Big Penalties Loom for Chevron in Ecuador

An Ecuadoran judge's ruling in an environmental case may make U.S. companies rethink the strategy of pushing lawsuits into overseas courts

By Michael Orey

Sixteen years after it was first filed and seven years after it was tossed out of U.S. courts, an environmental contamination lawsuit growing out of Texaco's oil drilling in Ecuador has become a giant legal and public relations headache for Chevron (CVX), which bought Texaco in 2001. The suit was refiled in Ecuador, and a judge there is expected to issue a ruling later this year or early in 2010. It is widely expected that he will assess billion-dollar damages against Chevron, which argues that the proceedings are politically tainted.

Chevron's experience calls into question a near-reflexive response by businesses that are sued in the U.S. over matters involving their operations abroad: They prefer to argue that the claims would best be pursued where the alleged harm occurred.

At a hearing set for Sept 1. in federal court in Miami,Dole Food will have to deal with the consequences of such a strategy in litigation arising from banana farms it once ran in Nicaragua. Meanwhile in July, Pfizer (PFE) asked the U.S. Supreme Court to reinstate a lower court ruling that said a lawsuit against it would best be heard in Nigeria. That case involves claims for injuries and deaths allegedly caused by drug testing Pfizer did in that country.

The question of how companies should respond to these suits has grown more complex in recent years, says Arvin Maskin, a defense attorney at Weil Gotshal & Manges in New York who is not involved in the Chevron, Dole, or Pfizer cases. While it may still make sense to try to get the cases out of the U.S., where plaintiffs are entitled to gather extensive evidence and can win high verdicts, "you do take some real chances in a foreign regime," he says. Another long-held assumption—that the American lawyers spearheading these suits for foreign plaintiffs will give up once a case gets booted out of U.S. courts—is also going by the wayside.

Big Coalition Stung Chevron Strategy

The Chevron litigation is a case in point. Plaintiffs' attorneys sued Texaco in federal district court in New York in 1993, seeking to hold the company responsible for widespread environmental devastation in the Amazon region of Ecuador, as well for as a host of health problems suffered by local residents. Texaco, which drilled for oil there from 1966 to 1992, said it cleaned up its mess and that in 1997 the Ecuadoran government signed off on the cleanup and released it from future claims. The company, now Chevron, persuaded U.S. District Court Judge Jed S. Rakoff to dismiss the case in 1996, arguing that it made more sense for the claims to be considered by Ecuadoran courts.

"Historically at that point plaintiffs' lawyers went away," says Steven Donziger, the lawyer who has been leading the charge for claimants in the Chevron case. "It was just too much trouble to litigate in another country." But Donziger didn't go away. He recruited Kohn Swift & Graf—a deep-pocketed plaintiffs' firm in Philadelphia best known for shareholder class actions—to finance pursuit of the case in Ecuador. Supporting the effort are advocacy groups such as Amazon Watch in San Francisco; "socially responsible" investment funds such as Trillium Asset Management, which has offered shareholder resolutions calling on Chevron to settle the case at every Chevron annual meeting since 2003; and even actresses Darryl Hannah and Trudie Styler (wife of musician Sting), who have lent their star power to generate publicity for the cause.

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