Global Policy Forum

US Oil Company Unocal Liable


By Robert Vosper

Corporate Legal Times
October, 2002

There are days when Unocal Corp. probably wished it had never heard of the Yadana project - a 254-mile pipeline that transports 525 million cubic feet of natural gas a day from four offshore platforms in the Andaman Sea, across the southern panhandle of Burma, into an energy plant in Thailand.

In 1993, California-based Unocal, France's Total Fina Elf SA and the Burmese government formed a joint venture to build the US$ 1.3 billion pipeline, which slices through tropical forests in Burma (now known as Myanmar) for 39 miles. The partners agreed to allow Burmese troops to clear the forest and level the ground, as well as provide labor and security. The troops did that and more.

Along the pipeline route, they went on a rampage - raping, beating and executing villagers, as well as forcing many into slave labor. One 20-year-old woman says soldiers beat her unconscious while she was nursing her baby. When she came to, her baby was lying in a nearby fire and would die a few days later from its injuries. Lawyers for the villagers not only accuse Unocal of knowing these atrocities were occurring, but say the company profited from the forced labor. Unocal denies these allegations.

"There is no way that anyone in our management would stand for that," says Dennis P. R. Codon, Unocal's general counsel. "It's inconceivable to me that we would ever engage in a project that would violate human rights."

Ultimately, a jury will decide what Unocal did or didn't know. After an unsuccessful attempt at getting their case tried in federal court, lawyers for the villagers filed suit in a California venue. A Los Angeles Superior Court judge ruled in June that Unocal can stand trial for the human rights violations committed by its partners in Burma under the legal doctrine known as "vicarious liability." Depending on its outcome, this case, John Doe. v. Unocal, may have a chilling effect on how multinationals operate overseas and how they select business partners.

"This case is a warning for all corporations," says Judith Chomsky, one of the lawyers for the villagers and cooperating attorney with the Center for Constitutional Rights. "And the warning is that they will not be immune from paying for the human rights violations that have enriched them."

The Mounting Rage

John Doe v. Unocal is just one of a handful of human rights cases involving U.S. companies that are wending their way through the courts; however, this is the first case of its kind to face a jury. And that, along with a growing movement among non-governmental organizations (NGOs) and activist groups to force companies to steer clear of countries with questionable human rights records, has many in-house counsel worried.

For years, corporations either covered up human rights violations or pleaded ignorance. Others argued they had strict policies against interfering in the cultural, social and political environments of foreign countries; however, these policies didn't stop them from lobbying these governments for preferential treatment on tax, trade and labor issues.

"I want to dispel as much as possible the argument that companies are at such a major disadvantage and can't put pressure on governments," says Peter J. Rosenblum, a lecturer on law at Harvard Law School and associate director of the Harvard Human Rights Program. "Most corporations are insisting on the lowest common denominator when it comes to the labor and human rights conditions that exist in countries. The notion that a company can still make the argument that it has no leverage in the countries in which it operates is an absurdity."

Not only can companies no longer use this argument, but NGOs and activist groups are more than happy to expose those who turn a blind eye to human rights violations perpetrated by their partners, contractors and subsidiaries. These violations can include everything from beating workers to hiring children to work in factories. And when an NGO uncovers a violation, it only takes a few minutes for the information to land in the lap of the media.

"There must be 500 to 1,000 NGOs out there that have web sites, and many of them are embarking on corporate campaigns," says Gerald L. Maatman, a partner at Baker & McKenzie in Chicago. "The days of flying under the radar screen are gone. There are a lot of watchdog groups out there taking a look at what you are doing, your code of conduct, business partners and suppliers. That list of web sites grows each month and these NGOs, unions and activist groups are all sharing information. And they are putting corporations in their crosshairs."

Once they have a company in their sights, these groups will systematically dismantle its brand and reputation, often convincing customers to boycott its products. "Companies these days are extremely vulnerable to attack in the way in which they do business," says Scott J. Wenner, a partner at Littler Mendelson in New York. "Customers will hit them where they can hit them the hardest, which is in not buying their goods."

Not only are the NGOs and activists becoming more aggressive and unforgiving, but the media, fund managers, shareholders, pension-plan managers and politicians are all keeping a watchful eye on the behavior of multinationals and their overseas operations. But it is the recent willingness of the courts to allow foreigners to sue companies on U.S. soil that has many in-house counsel clamoring to ensure their companies stay out of the spotlight.

Judicial Solutions

The most common weapon activists use to haul U.S. companies into court for overseas human rights violations is the Alien Tort Claims Act (ATCA), which was written in 1789 to grant federal district courts jurisdiction to hear "any civil action by an alien for a tort only, committed in violation of the laws of nations or a treaty of the United States." Congress originally enacted the law to prevent the United States from becoming a safe haven for seafaring pirates. For nearly 200 years, the act lay dormant until human rights lawyers rediscovered it in 1979, filing their first suit under the ATCA in a case involving torture committed by a Paraguayan official. So far, none of these ATCA cases have gone to trial, although a number are in discovery.

In the Unocal case, lawyers first filed suit in the U.S. federal court in Los Angeles under ATCA. However, the court dismissed the case on grounds that Unocal could not be held liable for the abuses because it didn't have control over the military. Undeterred, the lawyers filed suit in California arguing that the company violated the California Unfair Practices Act and enriched itself through tortuous means. Meanwhile, the federal court's decision is on appeal in the 9th Circuit.

"A lot of companies that are involved in these [ATCA] lawsuits are fighting them tooth and nail," says Errol P. Mendes, the former director of the human rights research and education center at the University of Ottawa and now a law professor. "One of the them will eventually make it through."

In addition to using ATCA and state laws, some activists have targeted companies for making false statements in public about their human rights record. For instance, a California supreme court judge ruled in May that Nike Inc. can stand trial for allegedly making false statements in public about the working conditions of its overseas factories. The company had argued that the First Amendment protected these statements; but the court rejected the argument, ruling that public statements by corporations are commercial speech.

The courtroom assault on corporations is not limited to the United States. In England, 7,500 South African workers sued Cape PLC, a building-material firm headquartered in Britain, after they contracted asbestos-related illnesses while working in the company's South African subsidiary. The claimants said they were exposed to asbestos 30 times the U.K. limit. After much debate in the House of Lords, the British courts agreed to hear the case, but the company settled for 21 million pounds [$ 33 million] before the case went to trial.

A number of European governments, as well as Australia's, also have passed legislation that requires companies to report on the labor and environmental impacts of their overseas activities. "If I am an in-house lawyer and my company does business around the world, I am going to need to monitor the new laws being passed in many non-U.S. jurisdictions that require me to report, monitor and be aware of activities in terms of my interactions with workers, the environment and local communities," says Maatman of Baker & McKenzie.

To do that, and keep their clients from becoming targets for NGOs and activist groups, general counsel have to be involved in the drafting and monitoring of codes of conduct - voluntary rules by which the company and its employees agree to abide by. "If I were the GC, I would want to ensure that my corporation has a code of conduct that dictates social responsibility, ethical treatment of workers and compliance with local and international laws," Maatman says. "You need to monitor this, deal with the problems overseas and ensure the code of conduct is being followed."

The Levi Way

At the urging of NGOs, many U.S. companies are beginning to develop codes that endorse the principles and values of the Universal Declaration of Human Rights. Adopted by the United Nations in 1948, this watershed document outlines the fundamental rights that all humans are entitled to, such as the right to life, liberty and security, as well as freedom from torture and cruel and degrading treatment. Other companies have used codes developed by NGOs, labor associations and consultants - most of which make a commitment to promoting and protecting human rights as outlined by international laws and treaties.

The hard part, however, is not in choosing the right code or drafting the language, but in living it, monitoring it and enforcing it with contractors, subsidiaries and employees. "In-house counsel need to put clauses into contracts with suppliers that basically require them to avoid engaging in any of the prohibitive practices outlined in the code and making prohibitive practices a breach of contractual arrangement they may have with the company," Wenner says.

One company that has done the latter successfully over the years is San Francisco-based Levi Strauss & Co., which in 1991 developed a code of conduct for all of its overseas contractors. This code outlines standards and practices contractors must follow relating to wages, working hours and employment. The company implemented the code when it began using third parties to manufacture its products in the early 1990s.

"Today, we have about 500 contractors in 50 countries," says Albert Moreno, general counsel of Levi Strauss. "The fact that we don't own these facilities doesn't mean we are any less obligated to see that these workers are treated in a way that complies with the law."

In crafting the code, the company put together a task force of key leaders in the company, which included attorneys from the legal department. "We were very much involved in the development of the code," Moreno says, "in terms of providing legal service, but also in participating as senior managers and providing our input on what we thought was the right thing for the company to do."

To ensure its code has teeth, the company constantly monitors contractors, and the legal department helps the business divisions define the contractors' requirements under this code. If a contractor violates the code, Moreno and his team help the business divisions involved develop a remediation plan for the contractor. In serious cases, the department helps its client create an exit strategy, something the company has done on a countrywide basis in China, Burma and Saipan.

"The bar has been raised, not only in the standards that you are going to apply in evaluating conditions in facilities overseas, but also in the degree of monitoring and the degree of compliance required," Moreno says. "In this current environment, you can no longer get away with not aggressively implementing whatever code you put in place and ensuring there is no serious issue or a failure to implement in good faith."

About the only criticism NGOs have of Levi's program is that the company has yet to fully implement a system that allows for independent monitoring of its overseas operations, a condition these organizations feel is necessary for a code to have credibility. However, most in-house counsel are wary of allowing an independent body to audit their client's human rights record.

"Most companies are much more willing to pay their lawyers to fight lawsuits and pay their PR people to put the right spin on bad news than actually taking the steps that prevent them from getting into trouble in the first place," says Morton Winston, chairman of the business and economic relations group of Amnesty International.

Deny, Deny, Deny

Companies also are unwilling to come clean when they uncover a violation of their code or if their overseas operations inadvertently contributed to a human rights abuse. Most go into crisis mode, sweeping the violation under the carpet or unleashing their public relations department on the problem. Few are willing to sit down to figure out why the violation occurred and how they can avoid repeating it.

"We will respect a company if they come clean and admit that something happened and that it was against their policy," Winston says. "What they do instead is deny, cover it up and fight in court. That takes an enormous amount of time on the part of senior managers and the legal team. It is a huge cost to these companies both financially and to their reputations." Winston says that if a company approaches Amnesty with a problem, it will help the company find a way to resolve it. It is only when Amnesty senses a cover-up that it goes on the offensive.

"We would much prefer to deal with companies on a cooperative basis," he says. "If the company doesn't respond and is unwilling to engage in dialogue, we will become less friendly and will confront them to get their attention."

Creating a code of conduct and a business culture that supports this type of openness requires, in part, a legal department that treats human rights as just another compliance issue. Unfortunately, few legal departments have reached that point. The exception is perhaps Nexen Inc. - an independent oil and gas company based in Calgary that has operations in Nigeria, Yemen, Brazil, Singapore, Colombia and Canada. Not only has the company created a code that employees live and breathe by, but its GC, John McWilliams, spearheaded the entire program.

McWilliams' Baby

GCs at most companies have taken a backseat on human rights, providing legal support only when a crisis erupts. However, McWilliams, who has been with the company since 1987, has been at the forefront of this oil company's push to develop a comprehensive code of ethics for overseas operations. "We believe that by operating by certain ethical standards, we can do business more effectively while also enhancing the communities we work in - not just economically, but by improving the human rights situation," he says.

McWilliams began developing Nexen's code of conduct in 1997, when the government and public expressed concern about whether Canadian companies should be in Nigeria, which had been suspended from the Commonwealth for human rights violations. In response, Nexen began working with the government to hammer out an acceptable code of conduct for companies operating in Nigeria and other hotspots. That code evolved into the International Code of Ethics for Canadian Business, a guide that outlines appropriate, ethical standards of business conduct relating to human rights, environmental protection and employee health and safety.

Nexen based this code in part on its experiences in Yemen, where it has operated oil wells since 1987 in the Masila Block, approximately 62 miles inland from the Port of Al Mukalla on the Gulf of Aden. After working in Yemen without incident for seven years, the company found itself in the middle a civil war. Despite pressure to pick sides, the company made every effort to remain neutral. It even put the proceeds owed to the government from the oil operation in an escrow account until a victor emerged. "This didn't please anyone," McWilliams says. "But it was an even-handed thing to do, and I think years later it was recognized as such. Basically, we decided to steer the course that would keep our people out of the conflict."

Another reason the company managed to stay out of the conflict was because it had developed a strong relationship with the community around its facilities, providing villagers with jobs, clean water, schooling and healthcare. "If you are not working with the local community, then you need more security," says Larry Murphy, senior vice president of international oil and gas operations at Nexen and the country manager in Yemen during the civil war. "As a result, you often get on the wrong side of a military situation and you create a flashpoint."

After that experience, Nexen began applying the lessons it learned in its other overseas operations. But it was McWilliams and his department that turned this way of operating into a formal code of conduct. "Guys like me are the frontline guys," Murphy says. "We try to do the things the best way possible. But John [McWilliams] has codified that and standardized it for our company and that is now the code we live by. Basically, John has documented the way we do business."

To ensure that every employee and contractor understands this way of doing business, McWilliams and other senior executives have developed training seminars and workshops. In these workshops, employees are presented with various case studies where they learn how best to respond to ethical dilemmas. The aim is to get employees to understand the code and to feel comfortable asking questions and reporting violations to superiors.

"Our goal is to get people confident enough to know what to do when they run into a problem," McWilliams says. "The biggest single trap that most people fall into is that they don't recognize the problem early enough. They suddenly look back and say, 'Holy shit, this is not in accordance with how we do business.' We want them to stop and think about it and then talk to the right people."

Leading the Pack

That attitude also permeates the executive suite at Nexen, where decisions about any new operation are based on an evaluation of both the economics of a project, as well as the operating environment and human rights record of the country. And unlike many of its competitors, Nexen is willing to turn its back on a lucrative deal when the latter is unacceptable.

For instance, in 1997 Nexen refused an offer to take over part of an oil and development project in southern Sudan because the country was embroiled in a violent civil war between the Muslim government in the north and non-Muslim rebels in the south. To date, that war has claimed the lives of more than two million civilians. When Nexen turned down this deal, Calgary-based Talisman Energy Inc. stepped in - a decision that now haunts the company, which has been vilified by NGOs, the press and Canadian citizens for aiding and abetting the government in its quest to eradicate non-Muslims.

"We never thought we could do business in Sudan," McWilliams says, "although there is a lot of oil there and a lot of money to be made. We just couldn't be party to it." He believes that in order to make these difficult decisions, the legal department needs to evaluate all deals both from a legal and business perspective.

"This is much bigger than compliance," McWilliams says. "You need to equip yourself to give guidance and learn the best practices. I am a great believer in having a total business understanding and an understanding of the climate in which you are giving advice. Some lawyers require a lot of training to get them to understand the business side of their jobs. And some individuals are more trainable than others. Frankly, the way to ensure you have the right people in place is in hiring. You need to look for people with personal commitment to these issues."

You also need commitment from the top. Although McWilliams spearheaded Nexen's development of a code of conduct, it hasn't been a lone crusade. He has had the support of the CEO, senior managers and employees, and that, experts say, is what will decide whether a company will end up like a Unocal or like a Nexen.

"I wouldn't want to see GCs going out on a limb if they are not being backed by decision makers in the corporation," says Rosenblum from Harvard University. "One of the things that we have lacked in the past is an incentive structure within the company so corporate counsel are not put in the position of being the wielder of the whip. You need positive incentives for corporate managers at different levels to look for the most human-rights friendly way to do business."

And the cost for a company that doesn't put these incentives in place can be significant. For instance, the plaintiffs in the Unocal case are asking the company to cough up every single dime it has earned in profits from the Yadana project. And that sum, estimated to be in the billions of dollars, doesn't include the cost to its reputation and brand, or the money it has spent over the past five years defending itself.

"It has taken some time and money," says Unocal's Codon. "It is certainly not the only matter that we have to handle, but it has been considerable."

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.