A MID-JUNE DECISION by a judge in California may have started a major overhaul of the rules under which American conglomerates operate in Asia. In a landmark case with possible wide-ranging repercussions, the judge ordered Unocal Corp. to stand trial for alleged human-rights abuses committed by the government of Burma, the oil giant's joint- venture partner in the development of a gas field.
The trial, slated for late September, will mark the first time that an American company will be tried in a U.S. court for allegations that workers abroad were forced to perform hard labour against their will and suffered abuses for the benefit of a business venture.If the judge's decision is upheld in higher courts, human-rights groups could unleash a raft of lawsuits in U.S. courts against American companies involved in ventures abroad in which workers are allegedly abused.
"Companies are going to have to take more account of the social consequences of their operations," says Stephen Davis, who edits Global Proxy Watch, a weekly newsletter on international corporate governance. "Critics are learning how to use a wide variety of tools to bring them to account for slave labour and human-rights abuses."
U.S. firms could be forced to be more careful in which countries and what types of projects they invest overseas. "Multinationals are at risk whenever they operate outside their home market," says Davis. "They risk entanglement with governments that are abusing their citizens or getting involved in situations where human rights aren't protected. Companies will have to take precautions from the board level on down."
Human-rights lawyers brought the suit against Unocal in 1996 on behalf of 15 Burmese villagers who lived near the pipeline constructed to take natural gas from the Yadana offshore gas field to Thailand. The $1.2 billion project, completed in 1998, was a joint venture involving Unocal, Total of France, the Petroleum Authority of Thailand and Burma's government. The villagers, who now live in refugee camps in Thailand, charge that Burmese officials forced them to work on the pipeline and in some cases kidnapped and raped them. Various reports by United Nations organizations and human-rights groups have confirmed that workers on the project faced slave-like working conditions.
Unocal has insisted that it never participated in human-rights abuses in Burma. But the judge ruled that Unocal could face vicarious liability, a legal principle that holds that business partners are responsible for each other's behaviour in a joint venture. In an earlier ruling in 2000, a federal judge had said that Unocal knew about and benefited from forced labour in Burma. But he dismissed the claims of the villagers, arguing that Unocal did not control the Burmese military and was not liable for its behaviour in a U.S. court. The judge remanded the case to a state court, which applied state law to conclude that Unocal could be tried for vicarious liability for the behaviour of the Burmese military.
"We're asking for $1 billion," says Terry Collingsworth, head of the International Labour Rights Foundation, which filed the case against Unocal. "To a Los Angeles County jury that's not an unreasonable amount. Unocal unjustly enriched itself by using unjust labour."
Collingsworth in recent years has filed five other human-rights lawsuits, including one against Coca- Cola for using paramilitary forces in Colombia to break up union activities in a bottling plant. The suits against Unocal, Coca-Cola and others were brought under the Alien Tort Claims Act, a law dating back to the late 1700s that allows foreign citizens to sue companies in U.S. courts.Another prominent case is against Exxon Mobil for alleged human-rights abuses by state security forces used to protect natural gas fields in Aceh, Indonesia. Collingsworth's suit was filed on behalf of 11 villagers from Aceh who contend that they were victims of murder, torture, kidnapping and rape by the military unit guarding Exxon Mobil's gas field. The suit charged that the abuses took place during the Indonesian military's efforts since 1998 to put down an insurgent uprising by separatists in Aceh. Exxon Mobil has denied any involvement with alleged abuses by the security forces.
A judge in Washington heard this case in April but, at the request of the world's largest oil company, delayed his finding until the Department of State could offer an opinion on whether the lawsuit would damage U.S.-Indonesian relations in the midst of the war against terrorism. The State Department's deadline was July 1, but it has requested an extension from the judge. The judge has said the State Department's opinion would not be binding on the court. Sixteen members of Congress and two senators sent letters to the State Department in late June warning that "intervention by the State Department in this private litigation"--i.e., simply issuing an opinion--"would send precisely the wrong message: that the United States supports the climate of impunity for human-rights abuses in Indonesia."
Why the recent surge in such suits? Sarah Cleveland, of the University of Texas's School of Law, attributes the surge to the "development of a substantial body of human-rights law" in the U.S. over the past 50 years. Cleveland says the trend has also been influenced by stepped-up investment activity abroad by U.S. companies in recent decades: With more investment, there are simply more opportunities for abuse. Add to that a new coterie of lawyers committed to fighting for human rights in courts rather than through boycotts and congressional sanctions.
Collingsworth insists that only corporations operating in situations of blatant human-rights violations should feel vulnerable. "The only companies that need be concerned are those doing business in lawless environments and using them to their advantage," the lawyer says. "This isn't a political stunt; it's not a vendetta against Burma. We're only trying to stop companies from doing business that violates human rights."
What are the costs to a company hit with a human-rights lawsuit? For starters, says Sean Murphy, who teaches international law at George Washington University, "there's a public relations issue whenever you're charged with human-rights abuses that can affect consumers as well as shareholders." Secondly, "there's a chance of an enormous judgment if you are found involved in widespread human- rights abuses."
The impact on Unocal's share price is less clear. While the share price has risen over the past 12 months even as the Dow Jones major oil companies index has dropped, over the past five years Unocal shares have fallen slightly while those of its industry peers have risen over 30%. Some analysts believe Unocal lags behind the average because it has not been a prospective candidate for a merger at a time when many of the world's largest oil companies have merged. "Unocal's involvement in Burma acts as a poison pill," says Simon Billenness, a consultant to U.S.-based Trillium Asset Management. "It's a barrier for the company being taken over by a larger company. That will depress the stock price."
FIRST BRIBERY, NOW RIGHTS
Some analysts believe the cases against Unocal, Exxon Mobil and other multinationals will prompt U.S. firms to start avoiding situations in which they can be implicated in human-rights violations. Carole Basri, president of the New York chapter of the American Corporate Counsel Association, believes the lawsuits will start a trend similar to the passing of the Foreign Corrupt Practices Act in 1977. This law prompted American firms to avoid paying bribes and convinced many foreign governments to pass their own anti-bribery laws.
U.S. firms now know "we don't want you to do certain things," says Basri, whose organization groups together the in-house lawyers of companies in New York. "One is bribery. Here we're saying we don't want you involved in human-rights violations."
Analysts say U.S. firms will no longer be able to ignore the risks back home of doing certain types of business abroad. This will prompt some U.S. firms to avoid investing in countries like Burma and others to be more diligent about insisting that local governments and partners not engage in conduct that raises questions about human-rights abuses. Still others may follow the example of Shell, which now includes a description of its social and environmental activities in its annual reports.
"We've been telling companies for years that if you don't pay attention to the environment and human rights it will come back and bite them on the bottom line," says Billenness of Trillium Asset Management, which promotes socially responsible investing.He adds: "Unless a company adopts a human-rights policy that is transparent, you're going to face greater risk of damage to your business, your stock price, your image and your brand."