Human rights lawsuits: mitigating a new threat

Oct. 5, 2009
Over the past decade, lawsuits have proliferated in US courts alleging human rights abuses against multinational companies.

Over the past decade, lawsuits have proliferated in US courts alleging human rights abuses against multinational companies. The oil and gas industry has been a primary target.

Last winter, Chevron stood trial in a high-profile case in San Francisco, accused of responsibility for deaths and torture carried out by the Nigerian military aboard a company oil platform. In June, a case against Shell in New York, involving accusations that Nigerian security forces tortured and murdered environmental protestors, settled on the courthouse steps. Two cases against Occidental Petroleum, one alleging that the company supported military attacks in Colombia and another that it supported murder and torture by paramilitary squads guarding the company's pipeline in Ecuador, are pending in Los Angeles.

These cases, and many others like them in courts around the country, create stark threats for oil and gas companies. The highly charged cases not only impose substantial potential liability and mammoth legal expenses but also bring steady and biting negative publicity, disrupt operations, harm future business, and create vast other indirect costs.

Given the current litigation trend, it is paramount that companies take simple and direct steps to protect against potential human rights problems as a complement to existing corporate responsibility programs.

The litigation landscape

Most of the human rights cases currently being filed against multinational companies are based on a once-obscure US law, the Alien Tort Statute (ATS). On the books since 1789, the ATS permits foreign claimants to file tort actions in US federal courts based on a handful of serious international crimes—"violations of the law of nations"—wherever on the globe they are committed.

For nearly 200 years, the law remained essentially unused. It was revived in 1980 in a case where Paraguayan citizens filed suit in New York against a Paraguayan police official for acts of torture and murder of a relative in Paraguay. When the courts allowed the lawsuit to proceed, dozens of others quickly followed.

Initially, these cases largely sought to emphasize unpunished international human rights abuses against government officials or oppressive regimes, leading to hefty damage awards regularly in excess of $10 million and sometimes $100 million.

Beginning in the mid-1990s, a new ATS trend emerged—suing transnational companies based on their overseas activities. The trend began with cases against Texaco based on its operations in Ecuador and picked up steam in 1997 after a federal court ruled that Unocal and its executives could be held liable under the ATS for alleged slave labor, murder, rape, and forced relocation of villagers by the Burmese military in connection with the construction of a pipeline.

Since that time, scores of multimillion-dollar lawsuits against corporations have been filed based on a variety of alleged abuses. To date, some 128 ATS cases now have been brought against corporate defendants, the vast majority of which have been filed over the last decade–a figure that does not include additional human rights cases brought under other laws. While that trend of human rights lawsuits has targeted numerous sectors, given the nature and complexities of the industry and its overseas presence, oil, gas, and other extractive companies are by far the most frequent corporate defendants.

The stakes

The potential legal liability in these human rights cases, in which graphic allegations of murder, torture, environmental devastation, and slave labor are the norm, is uniformly substantial. Unocal is estimated to have settled its ATS lawsuit for $30-60 million. In October, a federal court in Florida entered an $80 million ATS judgment against a Dutch company for trafficking workers and forced labor. Shell settled at a relative bargain of $15.5 million.

However, of equal or greater risk is the dramatic harm these lawsuits can do to reputations. Even where the company prevails in court, the costs are high, as favorable decisions often take years to obtain and the interim publicity can taint a corporate reputation, drive away investors and consumers, and create sharp tensions with host governments and operational environments to a point where even a threat of a human rights lawsuit can create immediate problems.

That concern, while always present, is more acute in a recession. When budgets are tight, consumers and investors pay close attention to their spending. In a true Darwinian sense, stronger brands survive and even grow, while weaker ones struggle. A key reputation differentiator in the marketplace is a company's perceived commitment to social good. As study after study confirms, a company's perceived social reputation is important to retaining existing customers and investors and to attracting new ones.

That positive social reputation is particularly significant for public companies. Analyses verify the importance of corporate character to sophisticated investors and to the impact of reputation on gaps between a company's book value and market capitalization.

Indeed, the current downturn notwithstanding, socially conscious investment funds, which have grown fifteenfold in the past 10 years, continue to thrive. In short, public consciousness of corporate reputation is increasingly vital, and the harm of an ATS suit is particularly significant right now.

Act now

Given the hazards in these high-profile, high-damage lawsuits, coupled with their rapid growth in US courts, it is critical for oil and gas corporations to pay close attention to human rights concerns.

Certainly, over the past several years, the oil and gas industry steadily has been incorporating some of those concerns into business planning through corporate responsibility programs and other voluntary sustainability initiatives. Those efforts have been motivated in no small part by economics. Companies face demands from funding sources, such as the International Finance Corp., Export Development Canada, and others that require attention to sustainability standards; close monitoring by nongovernmental organizations (NGOs) of the conduct of multinational companies; and pressures by foreign governments to meet minimum standards in operations or be denied a license to operate. The result has been general industry operating guidelines designed to improve community relationships and resource management.

Those types of sustainability efforts no doubt can improve relations in local operating environments, which may reduce the tensions and threats that often result in ATS and other human rights lawsuits. However, the efforts are not designed to directly address human rights problems, and in a period of falling stock prices for public companies, and in which most companies face challenges in attracting investments for their projects, even the hint of a human rights issue can have lasting effects.

The following are five concrete, inexpensive, and easy-to-implement steps designed to integrate sustainability, legal, and communication resources to address human rights issues directly and keep a company from being the latest casualty to the human rights litigation trend.

1. Develop a code. To the extent you have no written code of conduct that covers human rights, draft one. Emphasize in broad terms the company's commitment to promoting and protecting human rights, health and safety of its workers, the community, and other stakeholders and to probing potential abuses. While the code cannot realistically include or anticipate every human rights-related cause of action, write it to cover relevant types of conduct by employees and agents.

Tailor the code to the company's locations. Depending on the situation, a parent and all corporate subsidiaries or affiliates might have their own codes. Consider incorporating or referencing provisions contained in relevant legal instruments, such as the Voluntary Principles on Security and Human Rights (www.voluntaryprinciples.org), the International Labor Organization core conventions (www.ilo.org), or the Extractive Industries Transparency Initiative principles (http://eitransparency.org/eiti/principles).

2. Conduct a legal and communication risk analysis. For oil and gas companies, it is critical to understand the nature of the impact of operations on stakeholders and the degree of risks that you might face. Detailed assessments or matrices, which consider applicable laws, regulations, norms, and expectations, and prioritize levels of risk, can help provide that understanding.

Although there is no single right approach to conducting an assessment, include within the scope of your review the key factors that can lead to human rights problems, an assessment that involves understanding problems that have come before—which for oil and gas companies generally include use of force by security personnel, labor issues, and health and environmental matters—and predicting those that may come next. Seek to determine the risks and vulnerabilities based on country conditions, identify prior problems that have arisen in the relevant country in your and other industries, and analyze the role the government may play in your operation.

Ascertain the highest and lowest risk areas and, working with legal counsel, chart them to allow for precise and tailored mitigation approaches. Depending on the subject being scrutinized, it may be prudent to engage community members and other shareholders, or even government officials, and seek information from external company sources.

The main point is that to fully understand and evaluate the impact of an operation or operational risks, the more information the better. The risks identified, of course, should then be addressed as part of the company's compliance program.

3. Tailor your compliance program. For the risk areas identified on the assessment, ensure there are proper controls in place. That should include, at a minimum, integrating human rights issues into your compliance program, which in turn should include internal and external components.

• Internal. Internally, train key employees and officers on relevant human rights matters, and ensure they have high sensitivity to early indicators of a potential threat. Have knowledgeable personnel available to answer questions promptly, since human rights problems often arise quickly and without notice. Provide and publicize mechanisms for employees and nonemployees to report potential problems, and strive to foster a culture in which employees know that reports will be taken seriously and not lead to retribution.

Where problems are identified, they should be investigated, and immediate appropriate actions—such as disciplinary measures, remediation plans, or informing appropriate authorities—should be pursued. Consider asking relevant employees to sign periodic certifications affirming that they are unaware of human rights problems, and conduct periodic audits or reviews to gauge whether the program is working and to identify problems, control failures, and identify areas of improvement.

• External. Externally, carefully scrutinize formal and informal relationships with third parties. Most corporate human rights lawsuits are premised not on misdeeds committed by corporations or their employees but on the acts of others, with victims seeking to pin wrongdoings on the company itself through theories of vicarious liability.

Accordingly, conduct basic due diligence—through internet and public filing searches, background and reference checks, and other standard means—for overseas suppliers, agents, and contractors to ensure there is no history of human rights alarms. Consider drafting a third-party code of conduct, or at least including in third-party contracts clauses that require adherence to the company's code of conduct in whole or as relevant.

Consider provisions in third-party contracts that require key third-party employees to undergo training and provide periodic certifications, declare the company's expectation that the third party will adhere to pertinent local civil and criminal laws and international instruments, and identify the company's degree of responsibility over and rights in the third party; if none exist, make that clear.

Also consider including requirements and expectations regarding third-party subagents. Those third-party contracts also might include provisions that permit some means of monitoring third-party conduct. That monitoring should be pursued throughout the relationship through periodic inspections or audits, annual interviews, and other similar methods.

Of maximum importance to external compliance controls is placing a close watch on government service providers. Under the ATS, "violations of the law of nations" traditionally have been limited to misconduct by states or state officials, and many human rights claims tend to arise based on actions by, or in conjunction with, state actors.

In light of that, monitor formal and informal relationships with government and quasigovernment entities. While not always feasible, limit direct reliance for services on government entities or regimes with reputations for human rights abuses. That is especially true for security services, as corporate ATS and other human rights cases—as with Chevron, Shell, Occidental, Unocal, and others—frequently arise based on actions committed by police, military, or paramilitary units actually or allegedly operating on a company's behalf.

For companies that have no choice but to rely on foreign governments for various services that create human rights concerns, strive to enter into contracts or memorandums of understanding with relevant government entities. Those agreements should delineate respective roles and responsibilities. If the company lacks the authority to supervise or direct government employees, or the selection or assignments of government personnel, make that explicit.

Include, if possible, provisions stating clearly that all parties will comply with pertinent domestic and international human rights laws and conventions, violations of those laws will be investigated and reported to appropriate authorities, and suspected wrongdoers will be suspended from performing work for the company pending the outcome of those inquiries. If government entities will agree to provide relevant employees with human rights training, that is even better.

4. Watch for consolidations. The need to carefully scrutinize third parties extends in particular to consolidations. Far too often in the oil and gas industry, human rights problems are inherited from others. Given the state of economy, mergers and partnerships are increasing in frequency. Companies with good balance sheets have started to take advantage of the current situation to make acquisitions, which may continue throughout the year.

Conducting effective due diligence in those consolidation efforts is a strategic necessity. A failure to include human rights issues within the scope of that review, particularly for partnerships with, or acquisitions of, companies without strong compliance programs or who operate in jurisdictions without strong regulatory regimes, is potentially catastrophic. It can lead to a multimillion-dollar problem and deeply tarnish reputations for problems not of your making.

Just as with a third-party agent, include human rights issues within the scope of due diligence during the acquisition or investment process. Review public materials for potential human rights red flags. Determine whether lawsuits have been filed against other companies based on operations in the region. Ask basic questions of management and local residents about conflicts, lawsuits, and incidents. Request documents reflecting complaints, on or near-site injuries, or company internal or external investigations. A few simple inquiries might help prevent a major headache.

5. Be prepared for rapid response. Although some ATS cases are premised on a pattern of conduct over a lengthy period, most involve rapid responses to pressure-filled situations.

To minimize potential exposure, it is vital to be able to identify red flag circumstances in their nascent state and have a defined plan in place. That plan should include a coordinated effort between trained personnel at the relevant location, informed public relations staff, and knowledgeable legal personnel. Include immediate notification requirements to this core group and perhaps others when a red flag situation erupts. Consider requiring immediate investigations and, where appropriate, recording known facts to ensure an accurate record is made for possible later use.

While many such inquiries may be probed and handled internally, for more serious matters, independent external inspections may be warranted. And of course, where actual misdeeds are suspected, make sure to take immediate action.

Escalating hazard

Though the risk of a human rights lawsuit will not disappear, particularly in light of the growing litigation trend, these steps, beyond corporate responsibility programs, will help you reduce the likelihood of encountering this escalating hazard. And where litigation does occur, the possibility can be increased of obtaining an early dismissal or a positive jury decision and countering the wave of negative publicity.

In other words, while ATS lawsuits may continue to flow against multinational companies, responsible companies can mitigate their risks and work proactively to avoid falling prey to the trend.

The authors

Jonathan C. Drimmer, partner in the Washington office of Steptoe & Johnson LLP, heads the firm's Business and Human Rights Practice. An authority on the Alien Tort Statute, he advises and represents individuals on human rights-related issues, providing compliance advice, conducting internal investigations, and participating in litigation. Before joining Steptoe, he served as a deputy director for the Office of Special Investigations of the Criminal Division for the Department of Justice. He is an adjunct professor at Georgetown University Law Center and a Lexis/Nexis contributing expert on international legal issues.
Jennifer Millerwise Dyck is a vice-president based in APCO Worldwide's Washington, DC, headquarters. She advises clients in the areas of crisis communication, media and government relations, and stakeholder engagement. Before joining APCO, Jennifer served as director of public affairs at the Central Intelligence Agency (CIA). Before joining the CIA, she was deputy communications director for Bush-Cheney '04, where she managed the regional press operation, covering 17 target states. She also served as press secretary and deputy assistant for communications to Vice-President Dick Cheney from 2001 to 2003.

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