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News Release

New Class Action Vehicle Threatens World Economy

July 24, 2003

Contact:    Gary Clyde Hufbauer

Washington, DC—The Alien Tort Statute (ATS) of 1789, which allows foreign plaintiffs to use US courts to attack alleged wrongs occurring outside the United States, is becoming a major threat to world trade and investment. Existing and potential class action lawsuits under ATS could disrupt over 300,000 jobs in the United States and 2 million jobs in other countries, destroy over $300 billion in global trade and investment, and reduce world economic output by $70 billion. Moreover, the history of economic sanctions suggests that ATS cases would be unlikely to improve social conditions in targeted countries. Hence Congress needs to pass new legislation to clarify and limit the scope of the ATS.

The ATS states: "The district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States." It was little used for nearly 200 years. Beginning in the 1980s, however, the ATS has been invoked in several class action lawsuits brought in US federal courts by foreign (alien) plaintiffs for alleged wrongs that occurred outside US territory. As of 2003, ATS plaintiffs have sued more than 50 multinational corporations doing business in developing countries, alleging more than $200 billion in actual and punitive damages.

Awakening Monster: The Alien Tort Statute of 1789, by Gary Clyde Hufbauer and Nicholas K. Mitrokostas, foresees a nightmare scenario if Congress does not enact remedial legislation. While US circuit courts have yet to pass final judgment in a corporate case, firms doing business in countries that account for 5 billion people (including India and China) and half the world economy are potential targets. Within the next decade, 100,000 class action Chinese plaintiffs, organized by New York trial lawyers, could sue General Electric, Toyota, and a host of other blue-chip corporations in a US federal court for abetting China's denial of political rights, for observing China's restrictions on trade unions, and for impairing the Chinese environment. These plaintiffs might claim actual damages of $6 billion and punitive damages of $20 billion. Such blockbuster cases are already working their way through federal and state court systems. In another decade, ATS awards and settlements could rival asbestos litigation both in size and collateral damage (see box 4.1).

After 20 years of expansive judicial rulings, federal district courts and two circuit courts have held that corporations may be held liable under the ATS:

  • For violating treaty norms, even when the treaty in question was not ratified by the US Senate;
  • For violating the "law of nations" as contemporaneously interpreted by the trial court;
  • When either the corporation or its employees commit the violation; or
  • When the corporation is found to aid and abet its host government or act under color of law.

Judges in the Circuit Court for the District of Columbia, however, have held that the ATS confers jurisdiction only over violations recognized in 1789 plus those subsequently enumerated by Congress. The Justice Department has now put forward the same interpretation. This view may eventually prevail. For now, however, district courts are letting expansive ATS claims go to discovery and trial.
Cases now in court (summarized in table A.1) allege a variety of wrongs. They range from "classic" violations of international law-slavery, war crimes, and torture—to contemporaneous offenses such as forcible displacement, religious persecution, environmental pollution, and pharmaceutical testing. The growing wave of litigation threatens to turn US federal courts into agents of judicial imperialism. This development carries several hazards:

  • US court decisions will conflict with jurisdictional claims of other states, particularly when plaintiffs and defendants are both foreign;
  • They will inflame relations with foreign states that are home to multinational firms hit with ATS suits;
  • ATS class action awards will create another attorney-driven enrichment machine; and
  • Court decisions will interfere with the separation of powers: the executive branch is responsible for US foreign affairs under the Constitution.

Many developing countries are potential targets of ATS litigation because firms conducting trade with, or investing in, those countries will be sued. Important countries that have already been targets are profiled in table A4.4. The "at risk" category includes virtually all countries with unsatisfactory records—measured against contemporary standards—for political rights, civil liberties, economic freedom, and corruption. These nations have a combined population of about 5 billion people (including India and China) and a combined GDP of around $18 trillion. Compared with the United States, the countries at risk are mainly poor.

In 2001, two-way US merchandise trade with countries at risk was about $630 billion and US foreign direct investment (FDI) was about $220 billion. ATS litigation will diminish this trade and investment. In addition, ATS litigation will cause some foreign firms to withdraw their investments from the United States (since investment here makes them a litigation target). Interruption of trade and investment will adversely affect US firms and their workers.

Collateral damage to the US economy could be serious (see box 5.1): potential dislocation of 180,000 export-related jobs and as many as 130,000 jobs linked to inward FDI. Collateral damage to the economies of foreign target countries could be even more severe (see box 5.2): they could lose $60 billion of US merchandise trade, and $270 billion of world FDI, disrupting 1.9 million jobs and costing as much as $70 billion annually in lost GDP.

Advocates of ATS argue: "Let the courts do their work. Fears voiced by ATS critics will turn out to be unfounded." In response, Hufbauer and Mitrokostas note that, once courts have awarded significant damages in a handful of ATS cases, legislative reforms will become exceedingly difficult to enact for the same reason that snowballing asbestos litigation continues to elude congressional resolution (see box 4.1). Moreover, the authors are skeptical that ATS class action awards will significantly improve social conditions in targeted countries. The long history of sanctions shows little payoff, in human rights terms, from economic reprisals. Nor can the justification of ATS suits be simple compensation: two decades of asbestos litigation (box 4.1) have gone far past the point of compensation to injured persons.

There are several possible answers to the looming ATS crisis. One idea is a corporate code of conduct that would both establish minimum standards and provide a defense against ATS-type litigation for responsible firms. However, it took two decades after the US Foreign Corrupt Practices Act was passed in 1977 for OECD members to agree on a Convention for Combating Bribery of Foreign Public Officials. This precedent suggests that a corporate code might take years to negotiate. In the meantime, ATS plaintiffs could even use draft code language as South African ATS plaintiffs now cite the Sullivan principles, arguing that signatories to the principles recognized the wrongs of the apartheid regime yet continued to do business in South Africa-and therefore should now be liable for condoning apartheid.

Another possible answer to the problem is vigorous briefs and letters from the US government, as the State Department and Justice Department have recently submitted in several cases. These submissions are helpful but the courts are not obligated to follow suggestions by the executive branch. Moreover, an ad hoc case-by-case approach is not a fundamental solution to a systemic problem.
The most satisfactory remedy would be a Supreme Court ruling that sharply limited the scope of ATS. However, it may take years for a case to reach the Supreme Court, and the court could still issue a decision on narrow grounds specific to the individual cases.

Accordingly, the authors recommend congressional legislation to clarify and limit the scope of ATS litigation. Hufbauer and Mitrokostas urge Congress to follow the precedent set by the Torture Victim Protection Act (1992) and limit ATS jurisdiction to widely recognized international norms: piracy, slavery, forced labor, war crimes, genocide, torture, and extra-judicial killings. In addition, the authors propose these guideposts for ATS reform:

  • Confer exclusive jurisdiction in federal courts (pre-empting state courts) for all tort claims brought by alien plaintiffs for wrongs that occurred abroad;
  • Require plaintiffs to prove intent and substantial assistance in order to charge private defendants with liability;
  • Require plaintiffs to exhaust local remedies before bringing their suits to US courts and, when gaps are found in the reformed ATS statute, require US courts to use the law of the state with the most significant interest in the case to fill the gaps; and
  • Enact a 10-year statute of limitations, as in the Torture Victim Protection Act.

About the Authors

Gary Clyde Hufbauer, Reginald Jones Senior Fellow, was formerly Marcus Wallenberg Professor of International Finance Diplomacy at Georgetown University (1985-92); deputy director of the International Law Institute at Georgetown University (1979-81); deputy assistant secretary for international trade and investment policy of the US Treasury (1977-79); and director of the International Tax Staff at the Treasury (1974-76). He has written extensively on international trade, investment, and tax issues.

Nicholas K. Mitrokostas received his JD from Georgetown University Law Center in May 2003, where he served as editor-in-chief of Law & Policy in International Business. He has been an associate with Cleary, Gottlieb, Steen & Hamilton and will serve as a law clerk to Justice Judith A. Cowin of the Supreme Judicial Court of Massachusetts during 2003-04.

About the Institute

The Institute for International Economics, whose director is C. Fred Bergsten, is the only major research center in the United States that is devoted to global economic policy issues. The Institute's staff of about 50 focus on macroeconomic topics, international money and finance, trade and related social issues, and international investment, and cover all key regions—especially Europe, Asia, and Latin America. The Institute averages one or more publications per month; holds one or more meetings, seminars or conferences almost every week; and is widely tapped over its popular Web site.