United States: Three Tips For Investors In Mexico's Energy Sector Regarding Potential USMCA Claims

On March 10, Mexico's amended Electricity Industry Law entered into force, introducing preferences for the Mexican state-owned utility, Comisión Federal de Electricidad (CFE), with respect to the supply of electricity to the Mexican power grid. By favoring CFE, the law damages a wide range of investors who have made significant investments in Mexico's energy sector since Mexico's 2014 energy reforms. More than 20 companies have already filed for injunctions against the law in Mexican court, arguing that it violates Mexico's constitution. Many observers believe the law may also violate Mexico's commitments under international trade and investment agreements, including the United States-Mexico-Canada Agreement (USMCA), and view the measure as a step toward the total reversal of the 2014 reforms. 

Foreign investors in the Mexican energy sector-especially investors pursuing remedies in Mexican court-need to exercise care to ensure that they do not inadvertently forfeit their rights to seek relief under international trade and investment agreements such as the USMCA. This note offers three tips for US and Canadian investors to preserve and advance their USMCA rights. 

Background on the USMCA

The USMCA replaced the North American Free Trade Agreement (NAFTA) on July 1, 2020. The NAFTA provided for "investor-state dispute settlement" (ISDS), under which investors from one NAFTA Party in the territory of another NAFTA Party could initiate arbitration against the latter to seek monetary compensation for breach of any of the investment-related rules in the agreement. Subject to an important exception, the USMCA eliminates ISDS with respect to Canada, and it narrows access to ISDS as between the United States and Mexico (excluding with respect to investors with certain defined government contracts). The exception is that US, Canadian and Mexican investors with "legacy investments" in the territory of another Party-investments established during the lifetime of the NAFTA (January 1, 1994-July 1, 2020)-have full access to ISDS under NAFTA rules for claims brought within three years after the date of the USMCA's entry into force, meaning until July 1, 2023. Notably, Canada separately maintains ISDS with Mexico under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).

Tip #1: Litigation in Mexican Courts

An investor does not forfeit its rights to use ISDS to challenge the electricity law under the USMCA or the NAFTA merely by going to Mexican court. Both agreements allow investors to pursue domestic remedies, provided that if investors decide to initiate ISDS, there is no "U-turn": subject to certain exceptions, they may not initiate or continue proceedings relating to the same measure at the domestic level. However, both the USMCA and the NAFTA include a trap door that investors should avoid: if an investor alleges in Mexican court that the electricity measure breaches an investment-related rule in the NAFTA or the USMCA (or the CPTPP), that investor will be precluded from alleging breach of that same rule in ISDS. See NAFTA Article 1120.1 and USMCA Appendix 3 to Annex 14-D. This Mexico-specific provision-which is also found in the CPTPP-is intended to prevent investors from getting two bites at the apple through pursuing identical international claims against Mexico; unlike the United States and Canada, Mexico is a "monist" state in which treaty commitments automatically create private rights of action under domestic law. For US and Canadian investors in Mexico's energy sector, this provision makes it critical to frame arguments in domestic litigation carefully to avoid this pitfall. An ISDS tribunal will lack jurisdiction to address a treaty claim that the investor has previously alleged in Mexican court. 

Tip #2: Three-Year Transition Period

The ISDS landscape will change on July 1, 2023, three years after the date of the USMCA's entry into force. Canadian investors will be unable to file new claims against Mexico, though they will still have access to ISDS under the CPTPP. US investors will be able to file new claims, but with notable limitations. Except for those with certain defined government contracts, US investors will lose the ability to lodge some types of claims that might otherwise be viable with respect to the new electricity law, including indirect expropriation and fair and equitable treatment claims. Most US investors will also face requirements to initiate and maintain proceedings in Mexican court for as long as 30 months before they may pursue ISDS. Therefore, US and Canadian investors in Mexico's energy sector should be mindful of their potential change in circumstances on July 1, 2023. To file a claim before that deadline, an investor would need to submit a notice of intent to Mexico by April 1, 2023. 

Tip #3: State-to-State Dispute Settlement

Separate from ISDS, the USMCA permits each Party to initiate state-to-state dispute settlement against another Party. If a dispute settlement panel finds the responding Party to be in breach, and if the responding Party does not come into compliance, the panel can authorize the complaining Party to suspend benefits under the USMCA. This remedy can provide leverage to compel compliance with USMCA rules. Importantly, the United States or Canada could initiate state-to-state dispute settlement against Mexico, arguing that the electricity law breaches any of the USMCA's investment-related rules-or any other relevant rules in the agreement, such as those governing state-owned enterprises-without affecting US and Canadian investors' rights to initiate ISDS to challenge the same measure. Given this, US and Canadian investors should consider state-to-state dispute settlement in the suite of dispute settlement options and, as appropriate, advocate with their respective governments. 

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WilmerHale stands ready to assist clients with respect to dispute settlement options under the USMCA and other trade and investment agreements with respect to Mexico's amended Electricity Industry Law.

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