Chevron Expects to Fight Ecuador Lawsuit in U.S.

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As Largest Environmental Judgment on Record Looms, the Oil Company Reassures Shareholders It Won't Pay

Chevron Corp. (CVS), which expects to be on the losing end of a long-running environmental lawsuit in Ecuador, is turning its attention to fighting the expected multibillion-dollar verdict in the U.S.

The plaintiffs in the case, residents of Ecuador's oil-producing Amazonian rainforest, are seeking to hold Chevron responsible for environmental contamination they say was caused by Texaco, which operated in Ecuador from 1964 to 1990 and was bought by Chevron in 2001. An expert appointed by the Ecuadorian court has recommended the judge award the plaintiffs $27 billion in damages from Chevron, which would be the biggest environmental judgment against an oil company to date.

Chevron denies the allegations, arguing that Texaco's operations in Ecuador met local and international standards, that a $40 million cleanup effort in the 1990s resolved any environmental liability the company had there, and that any remaining problems are the responsibility of Petroecuador, the state-run oil company that took over Texaco's operations.

The stakes are high. Damages of $27 billion would represent roughly a tenth of the company's 2008 revenue, and a record-setting judgment could tarnish Chevron's image at a time when it has been trying to establish itself as environmentally friendly.

Chevron says it has given up the prospect of winning the case because the Ecuadorian court system is heavily influenced by President Rafael Correa, who has publicly sided with the plaintiffs. The company says it plans to appeal the case in Ecuador, but has little hope of prevailing. Both sides expect a ruling in the case later this year.

Chevron itself has never operated in Ecuador, and Texaco pulled out in 1992, leaving behind almost no assets for the court to seize in case of a judgment against the company. Therefore the plaintiffs will need to try to enforce any ruling in a country where Chevron does have assets, most likely the U.S.

Chevron has been reassuring shareholders that it doesn't expect to be forced to pay any judgment imposed by Ecuador.

"We're not paying and we're going to fight this for years if not decades into the future," Chevron spokesman Don Campbell said in an interview.

To prevent enforcement of a potential judgment in the U.S., Chevron will likely need to convince a U.S. judge it didn't get a fair trial in Ecuador -- something legal experts say won't be easy. "It's going to have to be pretty conclusive evidence," said Ralph Steinhardt, a law professor at George Washington University.

Complicating the matter for Chevron, after the plaintiffs originally sued Texaco in the U.S., Texaco convinced a U.S. court that the case should be heard in Ecuador, praising Ecuador's judicial system in court filings.

Texaco argued the case should be heard in Ecuador because the evidence and alleged damage were in the country. The plaintiffs argued that Ecuador wasn't equipped to deal with such a complicated case.

But Mr. Steinhardt, as well as other legal experts, said U.S. courts won't enforce a patently unjust ruling, regardless of what Texaco said during an earlier stage in the case.

Chevron has begun laying the groundwork for such an argument in court filings and letters to investors, questioning the qualifications of the court-appointed expert and arguing that recent incidents -- including the adoption last fall of a new constitution that replaced Ecuador's Supreme Court with a new body -- have called the entire system into question.

The plaintiffs argue Ecuador's court system has become less susceptible to corruption in recent years. Andrew Woods, a lawyer for the plaintiffs, accused Chevron of stalling. Chevron denies stalling, but has stressed to investors that any enforcement will likely take years.

The most immediate threat to Chevron, according to analysts, could be the impact a ruling would have on its reputation, particularly as the company seeks permission to drill in other developing countries.

The plaintiffs are hoping negative publicity will lead Chevron to settle the case.

Chevron has responded with its own public-relations campaign. Mr. Campbell said the company is responding to distortions from the plaintiffs.

Some shareholders, however, have urged the company to settle. Mr. Campbell said Chevron is working to defend its reputation, but won't settle a case in which it has done nothing wrong. "We're not going to be bullied into a settlement," Mr. Campbell said.

Write to Ben Casselman at ben.casselman@wsj.com