Alison Frankel

It’s been all of three weeks since U.S. District Judge Lewis Kaplan of Manhattan federal court lifted a stay on Chevron’s fraud and racketeering suit, which was filed in 2010 against the Ecuadoreans who accuse the oil company of contaminating the Lago Agrio region of the rainforest as well as the Ecuadoreans’ lawyers and advisers. But the two sides in this corollary to the endless litigation that produced an $18.2 billion judgment against Chevron in the Ecuadorean courts have picked up as though they never left off. This week Chevron filed a motion for partial summary judgment and renewed its motion for an attachment order that would effectively block the Ecuadoreans from enforcing their award. Lawyers for the RICO defendants, predictably, have responded with accusations of dirty tricks against Chevron and its counsel at Gibson, Dunn & Crutcher.

Chevron’s summary judgment motion, which asks Kaplan to reject collateral estoppel defenses based on findings in the Ecuadorean courts, is mostly a reformulation of arguments that have become all too familiar to anyone who follows the litigation. So I’ll focus on the new attachment motion, which includes some information we haven’t seen before. In January, you may recall, Kaplan denied Chevron’s request for a highly unusual pretrial order that would essentially have frozen the assets of the RICO defendants in anticipation of a Chevron victory and damages award in the New York case. The judge said that Chevron hadn’t sufficiently specified its alleged damages, aside from citing the $18.2 billion Ecuadorean judgment. “In these circumstances, Chevron has not demonstrated a likelihood of recovering any specific amount of damages,” Kaplan wrote. But he invited Chevron to come back when it had firmer evidence of its potential damages.

Chevron said in this week’s motion that it now has the evidence Kaplan asked for. The company hired two academic economists, Harvard’s Steven Shavell and Stanford’s Steven Grenadier, to determine the current value of the $18.2 billion judgment. Based on “the prices already paid or promised in exchange for interests in the judgment,” the economists opined that at this moment, the $18.2 billion award is worth $200 million. Chevron said that under RICO’s treble damages, it can realistically claim $600 million in a potential award in the fraud and racketeering case.

The company also said that it can recover trebled attorneys’ fees. Chevron’s brief said Gibson, Dunn and other lawyers have racked up fees of at least $60 million in amassing evidence and litigating claims that the Ecuadorean judgment was procured by fraud. (At least $30 million was billed just by Gibson, Dunn.) That added another $180 million to the potential damages Chevron said Kaplan should attach. And since the only significant asset of the RICO defendants is the $18.2 billion judgment, Chevron argued, Kaplan should attach the Ecuadorean award.

The Ecuadoreans’ lawyer, Craig Smyser of Smyser Kaplan & Veselka, told me Friday that Chevron’s new attachment order is as improper as its last one. For one thing, he said, the Ecuadoreans who obtained the $18.2 billion judgment are not accused of racketeering in Chevron’s complaint in Manhattan federal court, so Chevron shouldn’t be trebling its estimate of damages it can obtain against them. Smyser also said the oil company blindsided him and the other New York defense counsel by filing significant motions when the two sides were supposed to be conferring on a case management schedule. “It’s very unprofessional,” Smyser said.

He and John Keker of Keker & Van Nest, who represents Chevron litigation architect Steven Donziger, sent a series of letters this week to Kaplan, accusing Chevron and Gibson, Dunn of duplicity and bad faith. They also asked the judge to strike the oil company’s motions. “To use a military analogy, Chevron’s counsel used the cover of the truce flag to conduct offensive operations,” they said in a March 7 letter. At a minimum, they said in a letter Thursday, Kaplan should not hold them to a hearing next week on Chevron’s motions, but should grant them time to prepare.

Kaplan doesn’t seem inclined to grant that request, considering that he took less than a day to reject the RICO defendants’ claims that Chevron was behaving unethically. In an order attached to Smyser and Keker’s March 7 letter, the judge said their assertion was “without merit.” He said his instruction to meet and confer on a schedule “did not prohibit the filing of (Chevron’s) motions,” and denied the defense request that he strike the attachment and summary judgment motions.

Chevron counsel Randy Mastro of Gibson, Dunn told me Smyser is “flat out wrong” about whether Chevron can seek treble damages against the Ecuadoreans. Though they’re technically not included in Chevron’s RICO counts, Mastro said, they are the beneficiaries of the alleged racketeering scheme, so any damage award against them can be trebled. (I have a feeling we haven’t seen the last of this particular issue.)

The only thing Smyser and Mastro agree on is that the estimate of what Chevron has paid its lawyers is low. The Ecuadoreans’ lawyer said Chevron hasn’t spared a penny to attack his clients and their judgment, positing legal fees of $100 million a year. Mastro said that the $60 million cited in the attachment motion is “conservative,” adding that Chevron will “prove more in attorneys’ fees damages” when the RICO case gets underway. That total, of course, is growing by the day.

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In last week’s rejection of Chevron’s attempt to use U.S. courts to block enforcement of the Lago Agrio plaintiffs’ $18 billion Ecuadorean judgment, the U.S. Court of Appeals for the Second Circuit was clearly uneasy at the idea of American judges interfering with foreign jurisprudence. So far, the arbitration panel overseeing Chevron’s case against the Republic of Ecuador has had no such qualms. But with Chevron now relying heavily on the arbitration process to protect it from plaintiffs’ attempts to claim oil company assets, the panel’s power over foreign courts is going to become a key issue — and the Ecuadorean plaintiffs are now calling for the U.S. government to support Ecuador’s sovereignty. Chevron, meanwhile, argues that if anyone has caused harm to Ecuador’s constitution, it’s the Republic and the Lago Agrio plaintiffs, not Chevron and the arbitration panel.

The three-person arbitration panel, appointed under the terms of a bilateral investment treaty between the United States and Ecuador, is presiding over Chevron’s claim that the Republic of Ecuador is liable for any judgment in the Lago Agrio litigation. (The argument is two-fold: Chevron asserts that it has been denied due process, in violation of the investment treaty, and that the Republic signed an indemnification agreement years ago with its predecessor, Texaco.) The arbitrators don’t have jurisdiction over the individual Ecuadoreans suing Chevron, but they do have power over the Republic. Last spring, following U.S. District Judge Lewis Kaplan‘s imposition of a worldwide injunction barring enforcement of the Ecuadorean trial court’s judgment against Chevron, the arbitration panel issued an interim order instructing the Republic to “take all measures at its disposal to suspend or cause to be suspended the enforcement or recognition within and without Ecuador of any judgment against in the Lago Agrio case.”

This month, after an intermediate appeals court in Ecuador affirmed the $18 billion judgment, Chevron went back to the BIT arbitration panel to request emergency relief. Among other things, Chevron asked for a finding that the Republic has not complied with the panel’s interim order. Last week, the arbitrators converted their interim order into a interim award, which Chevron believes will be a big help in its attempts to persuade courts around the world not to permit the Ecuadoreans to take control of Chevron assets. In early February, the panel will hear evidence on Chevron’s allegation that the Republic is helping the Lago Agrio plaintiffs.

But here’s the thing: The Republic of Ecuador asserts that the arbitration panel has exceeded its authority by issuing an unconstitutional order. According to the Republic’s lawyers at Winston & Strawn, the panel’s instruction calls for the country’s executive branch to breach the Ecuadorean constitution’s separation-of-powers doctrine by meddling with the judicial branch. “The claimants have claimed in these proceedings that the executive branch has wrongfully injected itself into the legal processes by its occasional public comments over the years touching on a matter of public interest (as Presidents and Prime Ministers across the globe are wont to do),” Winston & Strawn wrote in a Jan. 9 letter to the arbitrators. “But the claimants ask this tribunal to order direct and actual state intervention in the court processes. The Republic doubts that this would be lawful in any state. It surely is not lawful in Ecuador.”

The Lago Agrio plaintiffs, I should note, do not need the Republic’s permission to bring enforcement actions against Chevron outside of Ecuador. Those are private actions, although they’re subject to Ecuador’s treaties with other nations. Nevertheless, the plaintiffs have waded into the BIT arbitration. Last week, the Ecuadorean lawyer Pablo Fajardo sent a letter to Ecuador’s equivalent of our Attorney General, informing him that the Lago Agrio claimants have constitutional concerns about the arbitration, arising from “fundamental human rights” as well as separation of powers.

“It is abundantly clear that the ‘interim’ order that Chevron is now demanding would violate Ecuador’s Constitution, as well as international law, and therefore would be null and void were an arbitral panel to issue it,” Fajardo’s letter said. “Moreover, such an ‘order’ would violate the [bilateral investment treaty], which reflects the clean intent of the two parties to protect the sovereignty of their respective judicial systems — something completely contrary to what Chevron is now demanding at international arbitration.”

Moreover, plaintiffs’ spokewoman Karen Hinton told me in an email statement Monday that the Ecuadoreans are calling on the U.S. government to take a stand in the BIT arbitration. “The United States government cannot stand silent while a U.S. company uses the treaty as a cover to violate international law, deny the human rights of indigenous groups, violate the constitution of a U.S. ally, and threaten the credibility of the entire investor arbitration dispute system — just so it can gain a perceived advantage in a private litigation,” Hinton’s email said.

Chevron’s lead arbitration counsel, R. Doak Bishop of King & Spalding, told me Monday that it’s Chevron, not the Republic or the Lago Agrio plaintiffs, that has seen its rights trampled under the Ecuadorean constitution. As a procedural matter, Bishop said, Chevron’s BIT arbitration is against the entire state of Ecuador, not just the executive branch. “Separation of powers is irrelevant,” he said. “The [arbitration panel's] award is directed to the entire state.” Bishop also said the arbitrators’ interim award is intended just to preserve the status quo, so that Chevron isn’t harmed when and if it prevails on the merits of its arbitration claim against Ecuador.

More fundamentally, Doak told me, Chevron is asserting that the Republic breached its own constitutional duty to Chevron to assure due process and to take responsibility for miscarriages of justice. The Republic of Ecuador’s constitutional argument against the BIT arbitration interim award “turns that on its head,” Bishop said.

What about the Lago Agrio plaintiffs’ call for the U.S. government to get involved? “That’s not the place of the U.S. government,” Chevron spokesman Kent Robertson said. “And the subject of these plaintiffs suddenly becoming champions of the Ecuadorean constitution is laughable …. This is the same cast of characters who brought a case against Chevron that was unconstitutional right out of the gate. This is hypocrisy at its highest level.”

Eric Bloom of Winston & Strawn did not return my call for comment.

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If Chevron was still hoping for a ruling from New York’s federal courts that would make it impossible for Ecuadorean plaintiffs to collect their $18 billion judgment against the oil company, Thursday’s long-awaited opinion by the U.S. Court of Appeals for the Second Circuit puts an end to that strategy. The appellate panel’s 30-page opinion — which explains the court’s Sept. 2011 order lifting the worldwide injunction barring enforcement of the Ecuadorean judgment — gives Chevron the chance to argue once again that the Ecuadoreans can’t collect in New York, under the state’s Uniform Foreign Country Money-Judgments Recognition Act. But in no uncertain terms, the Second Circuit advised that even if Chevron eventually persuades a New York judge that the Ecuadoreans procured their judgment through fraud, that judge cannot bar enforcement of the judgment outside of the United States.

“Nothing in the New York statute, or in any precedent interpreting it, authorizes a court to enjoin parties holding a judgment issued in one foreign country from attempting to enforce that judgment in yet another foreign country,” wrote Second Circuit Judge Gerald Lynch, for a panel that included Judges Rosemary Pooler and Richard Wesley. “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.”

The appellate panel’s ruling is based on what it said was Chevron’s inappropriate attempt to use New York’s Judgment Recognition Act to bar enforcement of a judgment that wasn’t even final at the time Chevron brought its case. The opinion explains that the New York statute is intended to be invoked only after the holder of a judgment attempts to enforce it inside the state’s borders. Chevron tried to get around that issue by asking for the injunction via a declaratory judgment action, in which it alleged that the Ecuadoreans procured their $18 billion verdict through fraud and political machinations. But the Second Circuit said Chevron’s interpretation of the Recognition Act, and U.S. District Judge Lewis Kaplan‘s endorsement of that interpretation, was “a legal misapprehension.” The act may only be used defensively, the panel said, not prospectively. For good measure, the Second Circuit also dismissed Chevron’s declaratory judgment suit.

“Whatever the merits of Chevron’s complaints about the Ecuadorian courts,” the opinion said, “the procedural device it has chosen to present those claims is simply unavailable: The Recognition Act nowhere authorizes a court to declare a foreign judgment unenforceable on the preemptive suit of a putative judgment-debtor.”

The first part of the Second Circuit opinion left open the possibility that Chevron could try again to block enforcement when and if the Ecuadoreans attempt to collect in New York. (Lawyers for the Ecuadoreans have said they will never attempt to enforce the judgment in New York.) But in the appellate panel’s discussion of international comity — a major theme of last fall’s oral arguments — the judges made clear their discomfort with a New York court interfering with international jurisprudence. Kaplan’s injunction, the opinion said, would establish New York as an international arbiter of justice, and that’s not what the Judgments Recognition law intends.

“As Chevron’s effort to secure injunctive relief illustrates, permitting such speculative declaratory relief would encourage efforts by parties to seek a res judicata advantage by litigating issues in New York in order to obtain advantage in connection with potential enforcement efforts in other countries,” the opinion said. “Such a regime would unquestionably provoke extensive friction between legal systems by encouraging challenges to the legitimacy of foreign courts in cases in which the enforceability of the foreign judgment might otherwise never be presented in New York.”

James Tyrrell Jr. of Patton Boggs, who represents the Ecuadoreans suing Chevron, welcomed the court’s opinion. “We are very pleased that the Circuit Court not only vacated the injunction, but also dismissed the declaratory judgment action in its entirety, making it clear that a New York court has no authority to decide enforcement of the now-affirmed Ecuadorean judgment for the rest of the world.”

The Second Circuit opinion does not address the merits of Chevron’s fraud argument (nor, for that matter, the fraud allegations that the Ecuadoreans have since lobbed at the oil company), and notes that Chevron’s racketeering suit against the Ecuadoreans and some of their lawyers and experts remains alive in Manhattan federal court. Chevron general counsel Hewitt Pate told me Thursday that the appeals court’s opinion means Chevron’s RICO case can now proceed. (That case, as I’ve reported, includes a motion for pre-trial attachment that could effectively preclude the Ecuadoreans from collecting on their judgment; Kaplan denied Chevron’s first attachment motion but indicated he’d reconsider.) “The Second Circuit’s opinion is a narrow procedural ruling that may change the order in which courts address the fraud being perpetrated in the Lago Agrio case, but it will not affect the ultimate outcome,” Chevron said in a statement. “Chevron will continue to pursue its fraud and racketeering claims against the Lago Agrio plaintiffs and the American lawyers who are perpetrating this fraud.”

As I’ve reported, Chevron has also appealed the Ecuadorean judgment to that country’s highest court, and has asked the arbitration panel overseeing its case against the Republic of Ecuador to block the Ecuadorean government from acting to enforce the judgment. On Wednesday, the bilateral treaty arbiters converted an interim order restricting the Republic into an interim award. Pate said the arbitration panel’s action underscores the Republic’s obligation to stop the Ecuadorean plaintiffs from enforcing the judgment, and enhances arguments Chevron will make elsewhere in the world if the Ecuadoreans try to collect. “It puts us in a more powerful position,” Pate told me. (The Republic has argued that the arbitration panel’s order is an impermissible violation of its separation of powers doctrine.)

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On Thursday, the U.S. Court of Appeals for the Second Circuit denied Chevron’s bid to re-impose a worldwide injunction barring Ecuadorean plaintiffs from acting to enforce the $18 billion environmental contamination judgment that an Ecuadorean appellate panel upheld earlier this month. That’s Chevron’s second big rebuff in its U.S. campaign to knock out the Ecuadorean judgment, which the oil company contends was fraudulently obtained. Two weeks ago U.S. District Judge Lewis Kaplan in Manhattan — theretofore a reliable backstop for Chevron — refused the oil company’s motion for an attachment order in its racketeering suit against the Ecuadorean plaintiffs and some of their lawyers and experts.

Chevron counsel Randy Mastro of Gibson, Dunn & Crutcher painted Kaplan’s ruling as a temporary setback, since Kaplan said the oil company could try again for a pre-trial attachment. But it’s impossible to spin the Second Circuit’s order Thursday as anything but bad news for Chevron. The appellate judges, you’ll recall, lifted Kaplan’s injunction on enforcement of the Ecuadorean judgment last September. They also stayed Chevron’s declaratory judgment case before Kaplan, in which the oil company sought to prove its fraud allegations against the Ecuadoreans and their lawyers. At the time of those rulings by the Second Circuit, the $18 billion judgment was still under consideration by the Ecuadorean appeals court, and the Ecuadoreans asserted that there was no need for an injunction because the judgment couldn’t be enforced while the Ecuadorean appellate process was underway. When Chevron went back to the Second Circuit this month, Gibson Dunn argued that since the Ecuadoreans are poised to enforce their judgment, the oil company now needs the injunction.

The Second Circuit’s denial of Chevron’s motion suggests that the U.S. appellate panel (which still hasn’t issued an opinion explaining its September orders) had bigger problems with Kaplan’s injunction than mere timeliness. Although there’s a chance the appeals judges based Thursday’s decision on ripeness, which was one of the issues both sides briefed, it seems likelier — both from the denial of Chevron’s motion and last September’s oral argument — that the U.S. judges are concerned about undercutting the authority of another country’s judiciary. If that’s the case, the Second Circuit simply isn’t going to permit Chevron to use the U.S. courts to block enforcement of the Ecuadoreans’ judgment around the world. Chevron’s racketeering case is still alive and kicking before Kaplan, but without an injunction or pre-trial attachment order, the RICO suit can only provide an after-the-fact remedy. (In an email statement, a Chevron spokesman said the company is “disappointed that the Second Circuit did not grant our motion to lift the stay, and we await the court’s opinion.”)

If Chevron can’t use the U.S. courts to bar the Ecuadoreans from collecting, it has three ways to attempt to evade the $18 billion judgment: the Ecuadorean courts; enforcement disputes elsewhere in the world; and the bilateral treaty arbitration between the Republic of Ecuador and Chevron over the scope of the release the Republic granted Chevron predecessor Texaco more than 20 years ago.

Ecuador is fraught with danger for Chevron. On Friday , the oil company filed a notice that it is appealing the $18 billion judgment to Ecuador’s highest court. Under Ecuador’s procedures, the intermediate appeals court that just affirmed the judgment can set a bond that Chevron must pay if it wants to stay enforcement during the high court appeal. But according to the plaintiffs, if Chevron loses the appeal, it loses whatever it posts as a bond in addition to the judgment. Even if that’s not the case, Chevron has taken great pains to move all attachable assets out of Ecuador. Posting bond there puts money within easy reach of the Ecuadorean plaintiffs.

Chevron also faces a deadline on a decision that affects almost half of the $18 billion judgment, which was imposed as a penalty for Chevron’s ongoing refusal to apologize for allegedly contaminating the Lago Agrio region of the rainforest. The penalty was first imposed by the trial court, after Chevron failed to meet its deadline for apologizing. The Ecuadorean appeals panel has given Chevron a new deadline to apologize and thereby eliminate about $8 billion of the $18 billion judgment. In a clarification the plaintiffs requested, the appeals panel said any apology would not be regarded as an admission of liability elsewhere in the world. But I seriously doubt Chevron will rely on the credibility of the Ecuadorean court system — which it has been calling corrupt for the last three years — as it opposes enforcement of the judgment in courts around the world. There’s almost no chance Chevron will apologize and risk the possibility that other courts will interpret the apology as an admission of liability.

Chevron made an interesting strategic decision before the intermediate Ecuadorean appellate panel that the plaintiffs believe gives them an edge in the international enforcement litigation that’s sure to follow any high court endorsement of the $18 billion judgment. There was some ambiguity in the Ecuadorean appellate ruling on the court’s consideration of Chevron’s fraud allegations. The plaintiffs requested clarification; Chevron did not, but was permitted to respond to the plaintiffs’ request. In the clarification issued last week, the Ecuadorian appeals panel said it had reviewed Chevron’s fraud allegations but hadn’t based its decision on them. The appellate judges said Chevron’s fraud case could be adjudicated in the United States.

The plaintiffs believe that the Ecuadorean court’s clarification — confirming that it reviewed Chevron’s fraud allegations and upheld the judgment despite them — will carry weight with other courts as they consider attachment motions by the Lago Agrio plaintiffs. Chevron, on the other hand, apparently intends to argue to judges around the world that there’s been no final determination on its fraud allegations. The oil company will also assert that the clarification is further evidence to support its claim that the Ecuadorean courts are in the pocket of the Lago Agrio plaintiffs. (“Any attempt to enforce this fraudulent Ecuadorian judgment will be met with a mountain of fraud evidence these plaintiffs and their counsel cannot surmount or even contest because it comes largely from their own admissions,” said Chevron counsel Mastro.)

Chevron’s perceived ace card, meanwhile, is the bilateral treaty arbitration. Last year, in a preliminary decision that didn’t get nearly as much attention as Kaplan’s worldwide injunction, the arbitration panel ruled that the Republic of Ecuador must act to bar enforcement of the Lago Agrio plaintiffs’ judgment. On Jan. 4, Chevron lawyers at King & Spalding sent an emergency letter to the arbitration panel, requesting that the panel demand a showing that the Republic is complying with its 2011 order. The Republic of Ecuador’s lawyers at Winston & Strawn responded on Jan. 9 with a 15-page letter explaining that the panel’s order would require an impermissible violation of Ecuador’s separation of powers between the executive and judicial branches. The panel has scheduled private hearings to take place in Washington, D.C., in February.

But for the first time in years, the Lago Agrio plaintiffs are beginning to talk with some swagger about prevailing against an embattled Chevron. They’re asserting their own fraud claims against Chevron before the Second Circuit and the BIT arbitration panel, and their lawyers at Patton Boggs and Smyser Kaplan & Veselka can point to a $18 million fee legal award the Ecuadorean appeals court imposed on Chevron for vexatious litigation tactics.

This case has already achieved epic status, but there’s still a long way to go. And the ultimate result seems harder than ever to predict.

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