in the arbitration under the treaty between the united states of america and the republic of ecuador

330 Pages·2015·1.29 MB·English

IN THE ARBITRATION UNDER THE TREATY BETWEEN
THE UNITED STATES OF AMERICA AND THE REPUBLIC OF ECUADOR
CONCERNING THE ENCOURAGEMENT AND RECIPROCAL PROTECTION
OF INVESTMENTS AND THE UNCITRAL ARBITRATION RULES (1976)
BETWEEN

MERCK SHARP & DOHME (I.A.) CORP.,

Claimant,

-and- PCA Case No. 2012-10

THE REPUBLIC OF ECUADOR,

Respondent.

RESPONDENT’S REJOINDER

COUNSEL OF THE REPUBLIC OF ECUADOR:

Dr. Diego García Carrión
Procurador General del Estado
Dra. Blanca Gómez de la Torre
Directora Nacional, Dirección Nacional
de Asuntos Internacionales de la
Procuraduría General del Estado
Dra. Cristel Gaibor
Ab. Diana Terán
PROCURADURÍA GENERAL DEL ESTADO

Mark A. Clodfelter
Janis H. Brennan
Alberto Wray
Dr. Constantinos Salonidis
Diana Tsutieva
Oonagh Sands
Ofilio J. Mayorga
Anna Toubiana
Joseph Klingler
FOLEY HOAG LLP FEBRUARY 20, 2015
TABLE OF CONTENTS

PAGE

I.  INTRODUCTION ................................................................................................................... 1 
II.  IN LIGHT OF ARTICLE VI(3)(A) OF THE BIT, THIS UNCITRAL TRIBUNAL LACKS
JURISDICTION BECAUSE MERCK ELECTED EXCLUSIVELY AND IRREVOCABLY TO
SEEK RESOLUTION OF THE DISPUTE IN ICSID ................................................................ 8 
A.  Article VI(3)(a) Provides For An Exclusive And Irrevocable Choice Of
Arbitral Remedy .....................................................................................................10 
1.  Introduction ................................................................................................10 
2.  The Structure of Article VI(2) and (3)(a) Establishes A Single,
Exclusive And Irrevocable, Choice Of Dispute Settlement Procedure .....12 
3.  The Structure Of Article VI(2) And (3)(a) As Compared To Election
Of Remedies Provisions In Other BITs .....................................................16 
4.  The Principle of Effet Utile Is Not Inconsistent With Ecuador’s
Interpretation ..............................................................................................19 
a.  The Phrase “Under One Of The Following Alternatives”
Confirms The Exclusive And Irrevocable Nature Of The
Single Choice Afforded Under Article VI(2) And (3)(a) ..............19 
b.  The Principle Of Effet Utile Does Not Preclude The
Confirmatory/Clarificatory Function Of Treaty Provisions ..........21 
c.  The Majority In Murphy v. Ecuador Ignored Crucial Elements
Of Treaty Interpretation, Which Resulted In Its Misapplication
Of The Principle Of Effet Utile ......................................................24 
5.  The Term “Or” In Article VI(3)(a) Denotes The Exclusivity Of The
Choice Prescribed Thereunder ...................................................................28 
a.  The Use Of The Term “Or” In Article VI(3)(a) Establishes
That The Choice Among The Listed Arbitration Procedures Is
Exclusive And Irrevocable .............................................................28 
b.  The Introductory Phrase In Article VI(3)(a) Has No Bearing
On The Question Whether The Provision Allows An Investor
To Choose Among Arbitral Fora More Than Once .......................30 
i
6.  There Is No Presumption That A “Fork-In-The-Road” Is Limited To
An Irrevocable Choice Between Local Remedies And International
Arbitration ..................................................................................................31 
7.  Provisions In Close Proximity With Article VI(3)(a) Confirm That
The Choice Prescribed Thereunder Is Exclusive .......................................37 
8.  The Object And Purpose Of Article VI(2) And (3)(a) Is To Avoid
Multiple Proceedings With Respect To The Same Investment Dispute
By Prescribing A Single, Exclusive And Irrevocable, Choice Of
Dispute Settlement Procedure ....................................................................39 
9.  Ecuador’s Interpretation Is Consistent With The Object And Purpose
Of The Treaty As A Whole ........................................................................42 
10.  Conclusion .................................................................................................45 
B.  Before Initiating This UNCITRAL Arbitration, Merck Definitively
Consented To The Arbitration Of This Dispute Under The ICSID Convention ...45 
1.  Introduction ................................................................................................45 
2.  Claimant Exclusively And Irrevocably Consented To ICSID
Arbitration ..................................................................................................46 
3.  Claimant’s Consent To ICSID Arbitration Was Valid ..............................49 
C.  Conclusion .............................................................................................................50 
III.  MERCK HAS NO “INVESTMENT” UNDER THE BIT ......................................................... 51 
A.  Introduction ............................................................................................................51 
B.  There Is No “Investment Dispute” Under The BIT ...............................................52 
C.  Merck’s Branch Does Not Qualify For Investment Protection Under The BIT ....54 
1.  No Treaty Rights With Respect To Merck’s Branch Were At Issue In
The Domestic Proceedings ........................................................................55 
2.  Merck’s Branch Is Not An “Investment” ...................................................56 
a.  The BIT Only Provides Protection To “Companies”—Not
“Branches” .....................................................................................57 
b.  Ecuadorian Law Stipulates That Branches Receive Different
Treatment To Companies ...............................................................60 
ii
c.  Merck’s Ecuadorian Branch Does Not Possess The
Characteristics Of An “Investment” ..............................................62 
D.  Merck’s Assets Are Not Protected Under The BIT ...............................................67 
1.  No Treaty Rights With Respect To Merck’s Assets Were At Issue In
The Domestic Proceedings ........................................................................67 
2.  Merck’s Assets Are Not An “Investment” .................................................68 
E.  The Chillos Valley Plant Is Not Protected Under The BIT ...................................71 
1.  No Treaty Rights With Respect To The Chillos Valley Plant Were At
Issue In The Domestic Proceedings ...........................................................71 
2.  The Underlying Litigation Did Not Prolong The Chillos Valley Plant
As An “Investment” ...................................................................................72 
F.  Conclusion .............................................................................................................74 
IV.  MERCK’S CLAIMS LACK MERIT, ARE INADMISSIBLE, AND ARE NOT WITHIN THE
TRIBUNAL’S JURISDICTION BECAUSE THEY ARE NOT BASED ON A FINAL ACTION
OF ECUADOR’S JUDICIAL SYSTEM AS A WHOLE ........................................................... 76 
A.  The Extraordinary Protection Action Is An Effective Remedy That Claimant
Could And Should Have Resorted To Before Asserting Its Denial Of Justice
Claims Under The BIT ...........................................................................................76 
1.  Under International Law, Only Obviously Futile Remedies Need Not
Be Exhausted .............................................................................................78 
2.  The EPA Was Capable Of Satisfying The Object Sought By Claimant ....82 
a.  The EPA’s Inability Under The Law To Stay Enforcement Of
The Challenged Judgment Does Not Affect Its Effectiveness
As A Remedy .................................................................................83 
b.  The Constitutional Court Has Authority To Order The
Repayment Of The Amount Of The Vacated Judgment And
Legal Costs Incurred As A Result Of The Constitutional
Violation ........................................................................................84 
c.  The Annulment Of The NCJ Judgment Would Have Created
An Effective Legal Basis For The Reimbursement Of The
Amount Of The Vacated Judgment ...............................................90 
iii
d.  In The Circumstances Of The Case, Ecuador’s Constitutional
Court Would Have Been A Reasonably Available And
Effective Remedy ...........................................................................95 
3.  Conclusion ...............................................................................................101 
B.  Exhaustion Of Available And Effective Domestic Remedies Is Mandatory
For All Claimant’s Treaty Claims........................................................................102 
1.  Article II(7) Of The BIT Imposes Requirements No Less Stringent
Than Those Imposed Under Customary International Law .....................102 
2.  Treaty Provisions, Including Article II(7), Regularly Reflect Existing
Customary Law Without Explicitly Referencing It .................................104 
3.  Article II(7) Does Not Violate The Principle Of Effet Utile Merely
Because Article II(3)(a) Also Invokes Customary International Law .....108 
4.  Although Tribunals Are Currently Split On The Interpretation Of
Article II(7), Those Interpreting The Article As Expanding Denial Of
Justice Protections Under Customary Law Have Misconstrued Its
Provisions .................................................................................................111 
5.  Although Claimant Is Correct That Some U.S. BIT Provisions Go
Beyond Customary International Law, Article II(7) Is Not Among
Them ........................................................................................................114 
6.  The Deletion Of Article II(7) From The 2004 U.S. Model BIT Does
Suggest That The Protections It Afforded Were Seen As Redundant .....116 
7.  In Any Event, Claimant Has Failed To Exhaust Local Remedies Even
Under The More Relaxed Interpretation Of The Standard By The
Chevron I Tribunal ...................................................................................119 
8.  Conclusion ...............................................................................................120 
C.  Claimant's Failure To Exhaust Local Remedies Deprives The Tribunal Of
Jurisdiction And Renders Its Claims Inadmissible ..............................................121 
1.  Denial Of Justice Claims Can Be Assessed As A Matter Of
Jurisdiction ...............................................................................................122 
2.  The Tribunal Has No Jurisdiction Because There Is No “Investment
Dispute” Within Article VI Of The BIT ..................................................125 
3.  Claimant’s Claims Are Inadmissible Because They Are Not Ripe For
Adjudication .............................................................................................127 
iv
4.  The Tribunal Has No Jurisdiction Because Merck’s Initiation Of This
Arbitration Is An Abuse Of Process ........................................................128 
a.  Claimant Commenced This Arbitration In Haste ........................128 
b.  Abuse Of Process Implicates The Tribunal’s Jurisdiction ...........129 
5.  Conclusion ...............................................................................................134 
V.  EVEN IF THE NCJ JUDGEMENT CONSTITUTED THE FINAL PRODUCT OF THE
ECUADORIAN JUDICIAL SYSTEM, THE CLAIMS SHOULD BE DISMISSED ON THE
MERITS BECAUSE MERCK HAS FAILED TO PROVE THAT IT SUFFERED A DENIAL
OF JUSTICE OR OTHER VIOLATION OF THE TREATY .................................................. 135 
A.  Introduction ..........................................................................................................135 
B.  Ecuador Does Not Misstate The Applicable Standard For Finding A Denial
Of Justice .............................................................................................................135 
1.  Merck Must Meet The High Thresholds Required Of Denial Of
Justice Claims On Either Substantive Or Procedural Grounds ................136 
2.  MSDIA Must Prove Its Claim By Clear And Convincing Evidence .......139 
3.  General Evidence Of Corruption Is Insufficient To Prove That A
Denial Of Justice Has Occurred In A Particular Case, And
Circumstantial Evidence Is Arguably Sufficient Only If It Leaves No
Room For Reasonable Doubt ...................................................................144 
C.  Merck Has Not Demonstrated That The NCJ Judgment Denied It Justice Or
That It Failed To Cure Any Alleged Defects In The Lower Court Proceedings .147 
1.  The NCJ’s Construction Of “Pre-Contractual Liability” As A Valid
Statement Of Ecuadorian Law Cannot Be Questioned By This
Tribunal ....................................................................................................147 
2.  Merck Has Failed To Demonstrate That The November 2014 NCJ
Decision Was Improper, Much Less “So Outrageous As To Be
Inexplicable Otherwise Than As” Arbitrary Or Grossly Incompetent,
“Juridically Impossible,” Or “A Shock To A Sense Of Judicial
Propriety” .................................................................................................150 
a.  Merck Does Not Contest That, Under International Law, An
Erroneous Or Mistaken Judicial Decision Does Not Give Rise
To A Denial Of Justice ................................................................151 
b.  The NCJ’s Construction And Application Of Pre-Contractual
Liability And Its Application Of Articles 721 And 1562 Of
v
The Ecuadorian Civil Code Were Well Within The “Spectrum
Of The Juridically Possible” And The NCJ’s Authority To
Interpret And Apply Ecuadorian Law ..........................................153 
c.  The NCJ’s Award Of Damages Was Rational And Well
Within The Range Of Juridically Possible Outcomes .................163 
i.  Claimant Has Grossly Misportrayed How The NCJ
Determined The Damages Awardable .............................165 
ii.  The NCJ Properly Applied Data In The Record On
Sales, Lost Sales And The Price Of The Plant To
Arrive At A Reasonable Limit On Recoverable Lost
Profits, And On Negotiating Expenses To Determine
Consequential Losses .......................................................169 
iii.  Finding Lost Profits For Loss Of Opportunity To Be
Recoverable As A Consequence Of Pre-Contractual
Liability Is Fully Supported By Authority And
Completely Rational ........................................................171 
iv.  Ecuadorian Courts Enjoy Wide Latitude In
Determining The Quantum Of A Damages Award,
Resembling That Exercised By International Arbitral
Tribunals ..........................................................................175 
v.  The Court’s Decision On Merck’s Request For
Clarification Was Entirely Proper ....................................179 
vi.  Conclusion .......................................................................180 
3.  Merck Enjoyed A Full And Fair Opportunity To Present Its Case
Before The NCJ, And Neither Of The Procedural Defects Alleged By
Merck Constitutes A Denial Of Justice ...................................................180 
a.  Merck Was On Notice Throughout The Litigation That Pre-
Contractual Liability And Breach Of Good Faith Were Bases
Of PROPHAR’s Claims, And It Enjoyed, And Took
Advantage Of, A Full And Fair Opportunity To Defend
Against Them ...............................................................................182 
b.  Contrary To Merck’s Misrepresentations, The NCJ Applied
Proper Procedure In Imposing Liability On The Basis Of Pre-
Contractual Liability And It Had The Jurisdiction To Do So ......187 
4.  The November 2014 NCJ Cured Any Alleged Defects In The Lower
Court Proceedings ....................................................................................197 
vi
D.  The Constitutional Court’s Decision Was Rational And Fully Justified Under
Ecuadorian Law ...................................................................................................198 
1.  The Constitutional Court’s Decision To Admit PROPHAR’s EPA
Accorded With Ecuadorian Law And In Any Event Does Not
Constitute Evidence Of Either Bias Or Undue Influence ........................201 
a.  The Admission Of PROPHAR’s Complaints Against The
Manner In Which The NCJ Applied The Law, Appreciated
Evidence, And Calculated Damages Does Not Render Its EPA
Inadmissible .................................................................................202 
b.  PROPHAR’S Request For Relief Does Not Render Its EPA
Inadmissible .................................................................................204 
2.  The Constitutional Court’s Judgment Is Rational And Consistent With
Ecuadorian Law .......................................................................................205 
a.  The Constitutional Court Cannot Be Impugned For Holding
That The NCJ Rejected The Court Of Appeal’s Calculation Of
Damages Based, Inter Alia, On The Cabrera Memorandum .......207 
b.  The Constitutional Court Cannot Be Impugned For Holding
That The Cabrera Memorandum Was Considered By The NCJ
As Evidence .................................................................................209 
c.  The Constitutional Court Cannot Be Impugned For Not
Directing The NCJ To Ignore Mr. Cabrera’s Expert Report, Or
For Not Ordering The NCJ Or PROPHAR To Refund Ro
Claimant The Amount Of The Vacated Judgment ......................211 
3.  Conclusion ...............................................................................................213 
E.  Merck Has Not Demonstrated That The September 2012 NCJ Decision
Denied It Justice ...................................................................................................213 
1.  Merck Has Failed To Demonstrate That It Had No Notice And No
Opportunity To Be Heard On Liability For Unfair Competition .............213 
a.  Merck Could Not Have Relied Upon An “Agreement” With
PROPHAR On Which Court Should Have Jurisdiction Over
Unfair Competition Claims, Because The Parties To A
Lawsuit Cannot Create Subject Matter Jurisdiction By
Agreement ....................................................................................215 
b.  Contrary To Merck’s Misrepresentations, Once The NCJ
Annulled The Court Of Appeals’ Judgment, It Had
Jurisdiction To Decide The Case As A Court Of First Instance
vii
On The Basis Of PROPHAR’s Complaint, Merck’s Answer
To It, And The Evidentiary Record From The Lower Courts .....217 
c.  Merck Was On Notice That PROPHAR’s Complaint Stated A
Tort Claim And Argued That Those Claims Were Ones For
Unfair Competition ......................................................................225 
2.  Merck Has Failed To Demonstrate That The September 2012 NCJ
Decision Was Improper, Much Less “So Outrageous As To Be
Inexplicable Otherwise Than As” Arbitrary Or Grossly Incompetent,
“Judicially Impossible,” “A Shock To A Sense Of Judicial Propriety,”
Or “One That No Competent Judge Could Make” ..................................228 
a.  Merck’s Theory Of “Typification” Is Irrational ..........................229 
b.  Merck Had Notice And Exercised A Full The Opportunity To
Be Heard With Regard to Article 244(3) Of The 1998
Constitution, And The September 2012 NCJ Decision Was
Not Unprecedented ......................................................................235 
3.  Merck Has Admitted That The NCJ Conducted A De Novo Review
Of The Evidence And Resolved The Case In Accordance With
Applicable Legal Principles .....................................................................236 
4.  Conclusion ...............................................................................................237 
F.  Merck’s Claims That It Suffered A Denial Of Justice At The Lower Court
Level Lack Merit ..................................................................................................238 
1.  Merck Has Grossly Misrepresented The Court of Appeals
Proceedings ..............................................................................................238 
a.  The Court Of Appeals’ Appointment And Use Of The Second
Set Of Experts Was Not A Denial Of Justice ..............................239 
i.  The Court Of Appeals’ Compliance With Ecuadorian
Rules Of Procedure Is Relevant To Show That Merck
Has Unduly Exaggerated And Distorted The Record ......240 
ii.  Claimant Does Not Present Any New Arguments Or
Evidence To Disprove Ecuador’s Showing That Both
Dr. Guerra And Mr. Yerovi Jaramillo Were Appointed
In Accordance With Ecuadorian Law ..............................241 
iii.  The Court’s Appointment And Use Of Mr. Cabrera As
A Damages Expert ...........................................................245 
viii
iv.  Qualifications Of The Replacement Experts
Qualifications ...................................................................258 
v.  The Court Of Appeals Did Not Fail To Consider
Evidence Offered By Merck ............................................259 
vi.  Notice Of The Court Of Appeal’s Order Taking
Control Of The Proceeding ..............................................262 
vii.  The Recusal Of Judge Toscano ........................................264 
viii.  The Nullity Petition..........................................................265 
ix.  The Court Of Appeals’ Judgment ....................................265 
x.  Other Instances Of The Court Of Appeals’ Rulings
Demonstrate That The Parties Were Accorded Equality .267 
b.  Conclusion ...................................................................................268 
2.  Merck’s Claims Concerning The Trial Court Proceedings Are Grossly
Exaggerated ..............................................................................................269 
a.  The Trial Court Provided Merck With Adequate Notice Of
The Testimony Of PROPHAR’s Witness ....................................269 
i.  Mrs. Usher De Ranson’s Testimony of 28 June 2004 .....270 
ii.  Mrs. Usher De Ranson’s Testimony Of 29 August
2005..................................................................................272 
b.  Merck Did Not Suffer Any Prejudice As A Result Of Its Local
Counsel’s Failure To Attend Usher De Ranson’s Deposition .....274 
c.  There Is No Evidence That The Trial Court’s Judgment Was
Issued And Delivered Improperly ................................................276 
i.  There Is No Indication That Judge Chang-Huang Did
Not Review The Record Before Issuing Her Judgment ...276 
ii.  Merck Has Not Shown It Was Not Properly Notified
Of The Trial Court Judgment ...........................................278 
d.  Conclusion ...................................................................................279 
G.  Merck Has Failed To Demonstrate That Any Of The Proceedings At Issue In
This Case Were “Influenced” By Judicial Corruption .........................................279 
ix