If This Lawsuit Succeeds, Global Business Changes Overnight

By Gerard Scimeca

How far should U.S. law reach beyond U.S. borders? In June, a federal courtroom in St. Louis will confront that question in a case with implications that extend far beyond one Missouri company or one Peruvian town.

The case is Reid v. Doe Run Resources Corporation, brought by roughly 2,800 Peruvian plaintiffs alleging injuries from emissions tied to the La Oroya metallurgical complex in Peru. The plaintiffs seek to hold liable Doe Run Resources Corporation, a Missouri-based parent company, even though the facility at heart of the lawsuit was owned and operated by subsidiary Doe Run Peru, all operations were in Peru, and the facility was operating for 75 years before Doe Run Peru purchased it in 1997.

At stake is not merely a dispute over pollution claims from a century-old industrial facility. The case could reshape the boundaries of U.S. tort law, weaken confidence in international trade agreements and paralyze U.S. investment in developing nations.

First, the facts. La Oroya was not a pristine operation spoiled by careless new owners. It had operated continuously since 1922 and, when Doe Run’s Peruvian subsidiary acquired the facility in 1997, it inherited an aging industrial site that had spent decades operating with virtually no environmental controls.

According to testimony already in the record, the new owners invested approximately $300 million attempting to modernize and improve conditions at what one expert described under oath as an “awful, rundown, polluting facility.” And, notably, the parent company back in Missouri simply wasn’t the decision maker. Even the plaintiffs’ own environmental expert—after reportedly spending 1,000 hours reviewing the evidence—could not identify a single operational decision made by the Missouri parent company. That matters because the plaintiffs’ jurisdictional theory depends precisely on the idea that the U.S. parent directed operations abroad.

If courts begin allowing American parent corporations to be hauled into domestic court for overseas operations absent evidence of direct control, every multinational enterprise—from manufacturing and energy to pharmaceuticals and technology—will face pressure to defend foreign disputes under an unpredictable patchwork of state tort law.

And it’s not just U.S. companies concerned by the precedent that could be set by this case—Peru itself has objected! The Peruvian government has twice formally protested the litigation to the U.S. State Department, arguing the case infringes on Peru’s sovereignty and conflicts with obligations under the U.S.–Peru Trade Promotion Agreement.

Trade agreements depend on mutual confidence that each nation’s legal system will respect agreed jurisdictional boundaries. If American courts effectively become global tribunals for disputes arising entirely overseas, foreign governments may reasonably conclude that the U.S. no longer honors the limits embedded in its own trade architecture.

There is also a profound investment question. Developing nations depend on foreign direct investment to rehabilitate outdated infrastructure. Investors willing to assume environmental and operational risk are often the only path toward modernization. But investors also study legal exposure. If a company that acquires a deteriorating foreign facility, spends hundreds of millions improving it, and operates through a locally incorporated subsidiary can still face decades of litigation in American courts, rational investors will think twice before taking similar risks.

The U.S. benefits enormously from an open global economy and from the rule of law. Both depend on predictability. If courts blur the distinction between parent corporations and foreign subsidiaries, disregard sovereign objections from allied governments, and create liability untethered from direct operational control, the result will not be greater justice. It will be greater uncertainty. And uncertainty is the enemy of investment, development and international cooperation alike.

Gerard Scimeca is chairman and general counsel for CASE, Consumer Action for a Strong Economy, a free-market oriented consumer organization he co-founded. 

This article was originally published by RealClearEnergy and made available via RealClearWire.