CH-15-18 The European Union and Other Regional Trade Areas – International Business Law and Its Environment : Book Guide

This Document Contains Chapters 15 to 18 Chapter 15 The European Union and Other Regional Trade Areas CASES IN THIS CHAPTER Commission of the European Communities v. Italian Republic (Public Monument Case) Commission of the European Communities v. Portuguese Republic Commission of the European Communities v. Italian Republic (Debt Recovery Case) National Farmers’ Union and Secrétariat général du gouvernement (France) TEACHING SUMMARY One of the major players in international trade is the European Union. Not only is it the grandfather of modern free trade areas such as NAFTA, but it also includes a monetary union (more recently introducing the standard currency of the euro) and a political union. These additional elements (which in some ways resemble the relationship among the states of the USA) distinguish it from free trade areas and custom unions. The EU’s common market seeks to eliminate barriers to the movement of goods, services, capital and workers. It also establishes common tariff (known as the Combined Nomenclature) and commercial policies toward non-member states. New states continue to seek EU membership while some present members (UK) seek to alter their membership terms. Current economic and political differences within the EU suggest changes in the area are likely to take place in the near future. CASE QUESTIONS AND ANSWERS Commission of the European Communities v. Italian Republic,(Public Monument Case) 1 What was the ECJ's holding with respect to Italy’s claims regarding the cost to local governments of maintaining cultural attractions and historic locations? Answer: Economic concerns such as costs can not be a reason to justify discrimination against EU members; only public policy, security or health concerns can justify such discrimination and none of these are present here. 2. What was the basis for the ECJ's decision that the Italian national government was responsible for the conduct of local governments with respect to the fees charged for admission to museums and cultural attractions? Answer: The EU is not concerned with the level of government within Italy that is responsible for admission fees. It holds the national government responsible for ensuring compliance with EU laws. Commission of the European Communities v. Portuguese Republic 1. What was the ECJ's holding with respect to Portugal’s claims that the prohibition upon window tinting was in the interest of public safety and eradication of crime? Answer: It acknowledged the ban did promote those interests, but also said there were other ways of inspecting the inside of vehicles that would not require banning window tinting. The ban affected all colored film to be affixed to motor vehicle windows even though some visual inspection of the inside could occur with some film that police could see through. 2. What was the basis for the ECJ's decision that Portugal’s law constituted an obstacle to the free movement of goods? Answer: No one would in the country would buy the film to be applied if it could not be used so external manufacturers of film would not be able to move their goods into Portugal. 3. How did the ECJ conclude that the prohibition on window tinting was an obstacle to the free movement of goods when the Portuguese law did not contravene a directly applicable EU law? Answer: There were laws affecting some of the products, but even for others if the prohibition is excessive compared to the need or aim of the prohibition it is not allowed. Any interference with the free movement of gods must be proportional and not a greater interference with trade than needed. This ban was excessive and not proportional as some tinting still allowed for the desired visual inspection of the inside of a motor vehicle. Commission of the European Communities v. Italian Republic (Debt Recovery Case) 1. What was the recommendation of the ECJ with respect to the consistency of Italy’s regulation of debt collectors with its obligation to ensure free movement of services? Answer: The ECJ recommended that Italy revise its debt collectors regulation scheme as inconsistent with the freedoms of movement and establishment and provision of services. 2. What provisions of the Italian debt collection licensing scheme were deemed inconsistent with the free movement of services? How was each of these provisions inconsistent with free movement? Answer: The ECJ invalidated Italy’s requirement that licenses be obtained from local police authorities on the basis that it imposed such requirement on non-Italian service providers regardless of whether they had complied with licensing requirements in the states in which they were established. The ECJ also invalidated Italy’s requirement that licenses be obtained on a provincial basis as an undue restriction upon the freedoms to provide services and establishment. The requirement was particularly cumbersome as service providers were required to file 103 separate applications if they wished to conduct business throughout Italy. 3. The opinion noted that the EU had not adopted rules with respect to the regulation of debt collectors. Nevertheless, the conclusion was that Italy’s regulations were inconsistent with the free movement of services. Is this an example of the EU improperly interfering with an area of economic activity that should be left to national governments? Why or why not? Answer: This question calls for student opinion. National Farmers’ Union and Secrétariat général du gouvernement (France) 1. What was the ECJ’s holding with respect to continued French prohibitions on the importation of British beef and veal? Answer: The European Commission issued emergency directives to protect against exporting bovine products from England, but France unilaterally imposed its own rules and procedures to prohibit the English products from entering its borders. The harmonizing directives 89/662 and 90/425 laid down the rules and procedures for the monitoring, compliance and public health protection among the EC member states upon the resumption of English beef exports. France did not have the right to unilaterally invoke Article 30 and prohibit the English beef products. 2. Does the decision give adequate regard to France’s concerns about the safety of British meat products or does it sacrifice such concerns in the interest of eliminating a barrier to the free movement of goods? What are the reasons for your conclusion? Answer: This question calls for student opinion. ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: The court ruled against Germany, finding that a unilateral requirement of minimum alcohol content was an “obstacle to trade” in violation of Article 30. The German argument that lower alcohol content might induce a tolerance toward alcohol than more highly alcoholic beverages” was not persuasive. Nor did the court find persuasive that it was an unfair consumer practice. Cases continue to be brought dealing with similar issues. Rewe-Zentral (Cassis de Dijon Case) no 120/78 (1979). 2. Answer: The European Court of Justice ruled that Italy was not justified in requiring the chocolate substitute label because: (i) the products were lawfully manufactured in member states, (ii) the label would likely lead to negative consumer perception of the products as inferior, and (iii) Italy failed to conform its laws with Article 30 of the EC treaty, which permits vegetable fats. By requiring the “chocolate substitute” label, Italy was impeding the free flow of goods among the EU members. As long as member states do not prohibit the sale of products lawfully manufactured in other states and do not erect obstacles to the free movement of goods, they are not required to harmonize their product descriptions. 3. Answer: The EU has been very cautious about Genetically Modified Organisms (GMO), which are sometimes called “Frankenfoods” after Frankenstein. Although some individuals and environmental groups in the U.S. are concerned about GMOs, the U.S. is in fact the largest producer of GMOs. In September 2003, the UN Cartagena’s Protocol on Biosafety went into effect and in 2004 developed additional regulations. The U.S. did not agree to these measures. The U.S., along with Australia, Argentina, Brazil, Canada, India, Mexico and New Zealand, challenged the EU position at the WTO. In April 2004, the EU lifted its moratorium imposed in 1998 by considering several applications for genetically modified products like sweet corn. However, resistance to GMOs continues in several member states. In the meantime, the WTO held the EU moratorium violated the GATT in June 2006. 4. Answer: The ECJ struck down the German regulation. The court found that the EU Directive on Waste and a Regulation on the supervision and control of Shipments of Waste EEC259/93 sets EU requirements. The court found that this regulatory scheme does not allow an individual state to impose its own scheme. The EU regulation lists when a state may object. The EU believes that the regulatory scheme is sufficient DaimlerChrysler AG v. Land Baden- Wurttemberg, 324/99 (2001). 5. Answer: Regulations affect all member states as a law without requiring the individual EU members to bring their respective laws into compliance. Directives require members to bring their respective domestic laws into harmony with stated principles. While the former ensures an immediate, single standard, the latter permits individual countries to factor in their individual legal and political philosophies and needs. 6. Answer: This question call for an opinion. Students may be directed to the Internet to conduct research on the current status of the euro starting with www.europa.eu. There are also numerous articles and editorials on the future of the euro in light of the recession and continuing fiscal difficulties in many member states available on-line. MANAGERIAL PROBLEMS 1. Answer: This is really an employment law question. Moreover, there is not enough information here to provide a complete answer. Assumptions will be made as follows: (i) “You have an office in Spain” means you are the manager for a U.S.-based company with an office in Spain. (ii) Ms. Jimenez’s “fixed term” means an annual contract, although it could mean anything from an annual contract to a quarterly (or seasonal) contract, (iii) Is the office “controlled” by a U.S. entity or is it a joint venture? In Equal Employment Opportunity Commission v. ARAMCO (1991), under similar facts, the U.S. Supreme Court held that Congress did not intend that Title VII applied abroad. Congress then amended Title VII to include firms operating outside the U.S. under “control” of a U.S. entity so U.S. anti-discrimination laws would apply. However, in Reyes-Gaona v. North Carolina Growers Ass’n, Inc. (2001), the Court of Appeals held that the ADEA did not apply to a Mexican who applied for a job in Mexico for working in the United States. The lower courts take seriously the U.S. Supreme Court’s instruction from the Aramco case of a presumption against extraterritoriality application of U.S. laws. 2. Answer: Expansion into Europe means a choice between EU and non-EU countries. Further, the latter option includes countries who are ordering their affairs to resemble an EU system (so as to gain entry soon), those who might like to gain entry to the EU, but, due to the adolescent nature of their economies, have no real hope of doing so in the near future (Albania, Ukraine), and countries uninterested in this partnership. EU countries offer a greater certainty and transparency of legal requirements so that U.S. businesses can better understand the playing field and adapt to foreign rules of doing business. (A unified currency also adds to such ease.) Countries that have a poor track record of implementing the directives, however, would not offer this type of certainty. Of course, beyond these political/legal concerns, any business should also assess the placement of their business with regard to ease of transport of their goods (location, ports, price), available employees, employment law, and consumer base. Finally, based on their readings in this chapter and those pertaining to import/export regulations and MFN/WTO, students should recognize that even foreign countries (not party to regional trade agreements) often have a cause of action or mechanism to complain of discriminatory treatment. Not all apparently discriminatory is deemed impermissible, however. 3. Answer: Strategically, exporting to Europe depends on the product. For example, if Labco is a tobacco company, they will not be able to advertise their products because an EU Directive banned newspaper, radio, magazine, and Internet ads effective 2005. The TV ban is already in place. Presumably Labco’s corporate counsel will research the various regulations, directives, customs, tariffs, and other regulatory framework to determine which site works best and make a recommendation to Labco’s board. A directive requires that a country’s laws come into harmony with the directive’s standards within a period of time, usually three years. The difference is primarily a matter of resources and whether a company can afford to lobby the European Council, Commission, or Parliament. A small company like Labco is probably not going to get the EC’s attention. Microsoft or Dell, on the other hand, probably could. Your best option is to file a complaint/petition with the European Court of Justice and establish that the directive itself violates a treaty such as GATT or other universally recognized legal standard. 4. Answer: (a) Yes there are standards. A search could begin here: www.tietoy.org or here: http://eu-lex.europa.eu. (b) There is a Directive 2009/48/EC on the safety of toys that is applicable throughout the EU. (c) Toys mean a product or material designed or intended for use in play by children of less than 14 years of age other than a product or material specified in Annex I of the Directive. The following are not toys for the purpose of the Directive but, in most cases, are subject to general product safety regulations and other EU legislation: 1. Decorative objects for festivities and celebrations; 2. Detailed scale models and kits for such models; 3. Folk dolls; 4. Historical replicas of toys; 5. Reproductions of real fire arms; 6. Sports equipment; 7. Bicycles, scooters, and electrically driven vehicles intended for travel on public thoroughfares; 8. Aquatic equipment intended to be used in deep water; 9. Puzzles with more than 500 pieces; 10. Compressed gas guns and pistols; 11. Fireworks; 12. Sets of darts with metallic points; 13. Products intended for educational use; 14. Electronic equipment such as computers and game consoles; 15. Interactive software; 16. Babies’ soothers; 17. Child-appealing luminaries; 18. Electrical transformers for toys; and 19. Fashion accessories for children not used in play. The Directive also excludes playground equipment intended for public use, automated playing machines, toy vehicles equipped with combustion engines, toy steam engines, and slings and catapults. (d) The essential safety requirement is that the user of toys, as well as anyone else, must be protected against risks of injury and to health when toys are used reasonably, bearing in mind the normal behavior of children. There are standards for ensuring such safety applicable to toy manufacturers as well as distributors, importers and other economic operators. These standards are intended to address all companies in the supply chain. Manufacturing standards are set forth in detail in Annex II of the Directive. The primary standards with respect to manufacturing include physical and mechanical properties, flammability, chemical composition, electrical properties, hygiene and radioactivity. (e) Yes when deemed appropriate with regard to the risks presented by a toy. (f) All toys must have the “CE” mark. The CE mark creates a presumption that the toy complies with the safety directive. Toys not bearing the CE mark are not permitted to be made available in the EU until they are brought into compliance with the safety directive. Some toys must also be accompanied by warnings and information on precautions to be taken during use. Further, toy manufacturers must ensure that their products bear a type, batch, serial or model number and their name, registered trade name and address. ETHICAL CONSIDERATIONS This question calls for student opinion. Based on the concerns set forth in the text, students may be asked whether further integration adds to the overall utility and greater good of the European community and its citizens in a manner consistent with utilitarianism. Follow-up questions are whether the success of greater economic integration is an adequate measure of the utilitarian nature of the EU, and who should determine the course of future integration in the EU – its citizens or the institutions. Finally, students may be asked to opine on what, if any, local concerns of European citizens are sacrificed as a result of the current state of integration or will be sacrificed as a result of the greater future integration. TEACHING SUGGESTION / COOPERATIVE LEARNING ACTIVITY This chapter presents a unique opportunity for students to explore negotiations as well as the tension between furthering the interests of the EU (which also should further the interests of individual EU member states) and furthering the interests of its individual states or allowing them to maintain their individual identities. Referring to any issue that affects the EU as a whole but at least two countries differently, divide students into groups representing a number of countries. Instructors may also wish to have an EU representative or EU arbitrator/ mediator. Ensure that two of the chosen countries have different interests in the issue or have interests different from the whole of the EU. Present the identified issue and have student representatives (who must vigorously represent the interests of their countries) negotiate a treaty, agreement, or directive. Instructors may wish to run several concurrent sessions of negotiations and compare and contrast the ultimate remedies suggested by each negotiation group. Additionally, if used as a graded assignment, the instructor can require country representatives to first submit a set of negotiation guidelines, outlining their positions and critical issues. This will provide a baseline for the later assessment of the negotiated remedy. Furthermore, this initial set of guidelines will help demonstrate the individual student’s research into and understanding of both the issues to be negotiated and their country’s position. The overall viability and creativity of the ultimate “armistice” would also be factored into the assessment. Chapter 16 Regulation of The International Marketplace CASES IN THIS CHAPTER Electra-Amambay S.R.L. v. Compañía Antártica Paulista Ind. Brasileira de Bebidas E Conexos Carlill v. Carbolic Smoke Ball Co. Quebec (Procureur general) v. Enterprises W.F.H. Itée Foreign Corrupt Practices Act Review Opinion Procedure Release 12-02 Securities And Exchange Commission V. Siemens Aktiengesellschaft World Duty Free Company Limited V. The Republic Of Kenya TEACHING SUMMARY Having found success within their borders, many businesses often look to introduce their products and services to markets outside those borders. Doing so, however, requires more than a good product. It requires adapting any product to the unique culture of that market, a connection and mechanism to bring the product into the local market, such as through a sales representative or products distributor, raising the foreign consciousness regarding the product through advertising, and being aware of how business is done in that market. At any of these critical junctures, a business may run afoul of not only local custom, but also host country and home country law. For instance, advertising and consumer protection laws differ around the globe as do customs regarding bribes. An important law pertaining to bribery of foreign officials is the U.S. Foreign Corrupt Practices Act (and its revisions) as well as its international counterpart, the OECD Convention on Combating Bribery. Additional Background: Introducing Products to Overseas Markets. Among the most important questions facing a company considering taking a product overseas is whether the product possesses global potential. Although a successful and established brand may seem promising, even well-established brands face difficulty entering overseas markets. One senior consultant has suggested that the company should ask whether the product is D.U.M.B., i.e., demonstrable, unique, meaningful, and believable. First, the company must be able to demonstrate the promise of the product or service, such as showing a cut-away photo of the promised cushioning in an athletic shoe. Second, there are often local alternatives to a new, foreign product, and consumers might be loyal to their local brands. Therefore, a company must build uniqueness into products that are recognized by local consumers. This somewhat insulates the new product from direct competition and can re-direct customer loyalty. For example, Coca-Cola is a successful global brand but tastes different in different regions (containing more or less carbonation and syrup). Thus, it is unique from market to market. Uniqueness can also help to respond to cultural nuances. Third, the product must be meaningful in that marketplace. For example, although Americans may desire low-fat and diet foods, other countries associate low-fat foods or “diet”-labeled drinks with obesity, rather than slimness. Other cultures that already enjoy low-fat diets find such labels meaningless. Finally, the promise of the product must be believable. Any claims must be credible and, if overstated, will be very damaging for products not yet established in the marketplace. One example of a D.U.M.B. product is the BMW. The BMW makes demonstrable claims regarding performance and engineering excellence; the German and American products differ somewhat, but maintain this promise of quality; the essence of the BMW is meaningful to American as well as German consumers; and its claims are believable, as the BMW performs as it promises to. See H. Parker Smith, “Is Your Product D.U.M.B. Enough To Take Overseas?” 14 World Trade, 30 (Feb. 2001). CASE QUESTIONS AND ANSWERS Electra-Amambay S.R.L. v. Compañía Antártica Paulista Ind. Brasileira de Bebidas E Conexos 1. What is the “special character” of Law 194/93 and how is its purpose achieved? Answer: Law 194/93 regulates the relationship between foreign manufacturers and firms and their representatives, agents and distributors in Paraguay. According to the Paraguayan government, it places such firms on equal footing with domestic firms regarding the termination of services of such representatives and agents without cause. 2. How does the court justify not implicating the social order of Paraguay? Answer: The court interpreted the law to impact a small minority of the population and thus did not impact the general interest or social order. 3. What are alternative methods for Paraguay to achieve the results it seeks under this law? Answer: This question calls for student opinion and additional research. Carlill v. Carbolic Smoke Ball Co. 1. Give at least three examples of where advertising or the subsequent acts that led to this suit suffered from vagueness problems. Answer: Examples in this regard include the lack of a specific individual to whom the advertisement was directed, the time when the smoke ball was to be used, the length of the guarantee (the current influenza epidemic or all future epidemics) and what is a reasonable time within which a person contracts influenza despite using the smoke ball. 2. What other factors could have influenced the court’s determination that there was a promise and not mere puffery? Answer: One factor could have been that the language of the offer should be construed against the party making the offer. Additionally, the court may have wished to curb mass media advertising that is viewed as harmful. It does seem somewhat unlikely, after all, that the Carbolic court would have gone to such pioneering lengths to find a specific offer if the advertisement had not been such a clear fraud. The lesson for the student of international marketing is rather simple: if an advertiser's ad is deceptive, judges will do their best -- even if they have to be somewhat innovative -- to punish the advertiser and remove the unwanted type of advertising from the mass media. It is hazardous for the advertiser to get close to the line. Quebec (Procureur general) v. Enterprises W.F.H. Itée 1. Do you think geography is a valid reason to favor one language over another? Answer: This question calls for student opinion. The court held that the unique geographic position of Quebec and centuries of daily use of the French language by its residents, many of whom do not speak English, supported the compromise embodied in the Charter of the French Language. Any impairment of equality rights was at most minimal. 2. Is it appropriate to favor one language over another provided people who do not speak that language are given the opportunity to conduct normal life functions in a different language? Answer: This question calls for student opinion. However, students may consider the court’s holding that the impairment of equality rights was minimal. Additionally, students may wish to discuss the growing use of bilingual signs and messages in the United States. 3. If French is so important and powerful to millions of people, why does it need legal protection? Answer: This question calls for student opinion. In answering this question, students may wish to examine the dichotomy between the growing worldwide use of English and attempts within the United States to designate an official language (as exemplified in English-only initiatives) despite this dominance. Foreign Corrupt Practices Act Review Opinion Procedure Release 12-02 1. How important are the following two representations made by the Requestors to the DOJ’s decision? (a) The Requesters will not give any money directly to the foreign officials, but will pay expenses directly to the providers. (b) The amount spent on hotels and meals will not exceed the GSA rate (which is the maximum per diem allowance that U.S. federal employees are entitled to receive as reimbursement for expenses incurred while on official trip within the continental United States). Answer: Both are important. They show the intent to not seek to influence the foreign officials and the payment of reasonable expenses is clearly noted as an affirmative defense. 2. Is this opinion sufficient to safeguard the identities of the parties involved in the proposed visit? Answer: Probably not. The facts show the requestors are in the foreign adoption business and it would not be difficult to determine who they are and where the foreign officials are from. 3. What role do DOJ’s prior Opinion Releases play in this decision? Answer: They are important and this case illustrates that by reviewing prior decisions by the DOJ, firm managers can use those decisions to tailor their plans to likely receive a favourable decision on their proposal. Securities and Exchange Commission v. Siemens Aktiengesellschaft 1. How did Siemens’ penalties relate to the caps on fines discussed earlier in this chapter? Answer: Students may wish to compare the fines imposed on Siemens with the previously discussed corporate fines of $2 million per violation and $25 million for willful violations plus civil fines. 2. Why was a German company subject to the U.S. FCPA? Do you think FCPA enforcement is effective if the foreign officials accepting the bribes are not held accountable? Answer: The Foreign Corrupt Practices Act is applicable not only to companies organized pursuant to U.S. law but also foreign companies offering securities for sale in the United States. Thus, Siemens’ offering of securities in U.S. capital markets brought it within the scope of the Foreign Corrupt Practices Act. The second question calls for student opinion. 3. Why did Siemens’ internal efforts to stop corruption not result in more lenient treatment from the U.S. government? Answer: This is most likely due to the blatant culture of corruption alleged to exist within the company, the absolute failure to implement adequate internal controls to prevent FCPA violations and the elaborate scheme created by employees to avoid the FCPA’s accounting requirements. World Duty Free Company Limited V. The Republic Of Kenya 1. How does the tribunal support its conclusion that bribe payments are unacceptable under international public policy? What role does the Convention on Preventing and Combating Corruption that is approved by the African Union play in the tribunal’s reasoning? Answer: It refers to various conventions as well as laws in Kenya that have long sought to make bribery and corruption illegal and even criminal. The African Union Convention shows that bribe payments are condemned throughout the region. 2. How important is it that Kenyan and English law also prohibit bribe payments? Answer: The bribe is illegal in both the payor’s country and in the payee’s country so both parties to the transaction know their action is illegal. 3. What does the tribunal mean when it says that the bribe and the 1989 Agreement were “one overall transaction”? Answer: They cannot be separated. The bribe brought the agreement into place and if the bribe is illegal, as noted, then the agreement is also illegal. ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: Demblans is an independent agent, or, as more often termed in the U.S., an independent contractor. Basic agency principles should be considered, such as: is the business distinct (here, building is unrelated to a tech firm), the degree of skill required to do the job, whose tools and facilities are used, whether there is a defined period of employment, and the basis of compensation. Here, construction is a business quite different from tech work, requires a high degree of specialization and skill, and will be limited to tools and materials provided by Demblans rather than Sobodka. Though the construction may be modified by Sobodka’s request, this does not suggest that he will be supervising the professional performance of Demblans as much as noting his wishes regarding the project. The fixed price also cuts in favor of such status even though there is limited reimbursement in the limited event of unforeseen circumstances. Similarly, Demblans’ flexibility in scheduling and work organization indicates an independent agency relationship. As to scheduling, the principal, Sobodka, has only laid out the date by which the assignment is to be completed. As to work organization, he has only retained the ability to provide details if he chooses, but the contract anticipates Demblans will be doing the day-to-day work. If Sobodka were to use his right so frequently as to interfere with Demblans' performance, his requests may be viewed as “unreasonable” under the contract and not enforceable. 2. Answer: This also focuses on the agent/independent agent distinction, and illustrates that real life does not always fall easily into pre-established categories. The scheduling responsibilities suggest a dependent agency. Work organization is mixed. Penton's ability to be highly specific cuts in favor of dependent agency. But Ortiz's use of his own employees, under his direction, evidences significant potential for independence. This independence is further buttressed by the commission arrangement -- an agent that is completely following another's instructions is unlikely to take the entrepreneurial risk that he will sell insufficient plows to cover his overhead. The reimbursement is a feature of independent agencies, but here it is limited to marketing expenses. 3. Answer: This recalls the Carbolic Smoke Ball decision and the punctiliousness of the advertising laws in countries like Germany. Giebbels will be able to enforce the advertisement only if it is sufficiently specific to be an “offer.” The vagueness inherent in what cars are “comparable” would prevent many courts from finding an offer subject to acceptance. Nonetheless, a German court might feel sufficiently offended by the claim to find an offer. 4. Answer: If Borges does not develop a new advertising campaign for a nation where most citizens consider beef consumption to be sinful, it is courting catastrophe. Even if its advertising does not actually break the law, it may prove offensive to much of the local population. Sometimes such religious offense can lead to violent responses. If Borges does not wish to invest in a local advertising campaign, it probably should not expand into India. 5. Answer: On its face, the situation simply suggests knowledge, business success, and ability to make the deal translates into a greater rate of remuneration for one’s services. Hence, Casanas y Diaz gets paid more because she is more successful, and, therefore, can demand a higher price. There may, however, be an underlying problem regarding just how Diaz manages to obtain so many contracts for her clients. If it is through bribery of foreign officials or others with the authority to award contracts, the FCPA may be implicated (both at the national and international levels). 6. Answer: Under the worst case scenario, the rumors might be true, and sex could be a form of bribery if it is the quid pro quo for an award of a contract. Even if the rumors are true however, the romantic relationship might be unrelated to Diaz’s success and that of her clientele. 7. Answer: A $10,000 payment would itself be financially immaterial to a $500,000,000 company. If the circumstances under which the payment was made were such as would implicate company officials, however, the adverse publicity attendant to possible prosecution might nonetheless be qualitatively material. Further, it is possible that the company's accounting systems might be viewed as having been insufficient under FCPA's record-keeping requirements to track the payment. But in the circumstances related in the question, it appears that the company was simply duped by its agent. Although the issue is not free from doubt, there is a good argument that the company need not report the payment. MANAGERIAL IMPLICATIONS Entering a new foreign market is often made easier by hiring a products distributor or a general consumer goods distributor based in that country. As discussed in this chapter, such a distributor might be an agent or an independent contractor, and students should assess the benefits of each. One should note, however, that “incentives” and lavish gifts bespeak of bribes. Companies should have in place and enforce policies that prohibit or establish controls for such “gifts”. Consequently, managers should consider the legal and ethical limits to such transactions (under the FCPA and the OECD Convention), the ramifications of acts of agents or independent contractors doing business “as usual” but on the firm’s behalf, and any mechanisms that would distance the firm from any illegalities (including which mechanisms would be ineffective in doing so). ETHICAL CONSIDERATIONS 1. This consideration calls for an opinion. 2. This consideration calls for an opinion. Students may wish to update this story as developments warrant, including allegations that Saudi Arabia threatened Prime Minister Blair with making it easier for terrorists to attack London unless the corruption investigation was closed and efforts to launch an investigation of this transaction by U.S. law enforcement officials. The closing of the investigation was rejected by High Court in April 2008. In an action brought by the anti-bribery groups Corner House Research and the Campaign Against Arms Trade, the Court condemned the discontinuation of the investigation as an “abject surrender” and a threat to the reputation of British justice. However, the House of Lords reversed the High Court in July 2008. In his opinion, Lord Bingham stated that the only issue for determination was whether the refusal to prosecute was a proper exercise of the Serious Fraud Office’s discretion rather than whether the decision was right or wrong. Lord Bingham concluded that the decision was “courageous” in its conclusion that saving British lives outweighed the public interest in pursuing a conviction against BAE. Lord Bingham concluded that a responsible decision-maker would have reached the same conclusion when confronted with such “an ugly and obviously unwelcome threat.” As a result, the U.K. Serious Fraud Office did not reinstitute the investigation. This result was condemned by anti-corruption groups throughout the United Kingdom who characterized it as a threat to the rule of law, a legal license for international blackmail, and symptomatic of the government’s reluctance to combat corruption. For its part, BAE announced it would adopt a new ethics program, which included a global code of conduct, monitoring procedures, and increased employee training and stakeholder consultation. Chapter 17 Protection And Licensing Of Intellectual Property CASES IN THIS CHAPTER APPLE, INC. V. SAMSUNG ELECTRONICS CO., LTD. Diamond v. Chakrabarty Mobile Communications Services, Inc. v. WebReg, RN TVBO Production Limited v. Australia Sky Net Pty Limited Comite Interprofessional du Vin de Champagne v. Wineworths Group, Ltd. A. Bourjois & Co. v. Katzel CSU ET AL. V. XEROX CORPORATION TEACHING SUMMARY The protection of intellectual property, be it copyrighted materials, trademarks/ tradenames, or technological patents, has become increasingly important in the global marketplace. For example, a patent application or trademark filed in one country will not ensure IPR protection in another country. Many international treaties, such as WIPO, and disputes resolution systems now exist that provide uniform rules, seeking to protect IPR and recognizing divergent national protections of IPR. The most recent incarnation of this issue has been with regard to technologies and domain names. CASES AND QUESTIONS Apple, Inc. v. Samsung Electronics Co., Ltd. 1. Should patent cases be decided by lay judges and juries? Answer: On the one hand, almost all cases are decided by lay judges and juries, so why should patent cases be different. On the other hand, there are special judges for tax cases and international trade cases and only one court of appeals hears patent case appeals, so specialized judges may make sense in patent cases too. Students can provide their opinions. 2. Are litigation damages too high in patent cases? Answer: Students will likely have varied opinions. Often high damages are reduced on appeal. Patent violations do cause significant injuries to competitors, but at what cost? 3. How can the legislature improve the patent system and reduce the inefficiencies of litigation? Answer: Worthy of discussion, but difficult to answer. Diamond v. Chakrabarty 1. The foregoing decision was decided by the Supreme Court by only a 5 to 4 vote. Do less developed nations agree with the majority or minority? Why? Answer: Less developed nations would most likely agree with the minority as they may lack the scientific and technical expertise to create such life forms and may be placed in a position of paying royalties for utilization of such life forms within their boundaries. 2. Has the development of artificial life forms been encouraged by the Supreme Court’s decision? Is this a good thing? What would have happened to the Horizon oil spill in the Gulf of Mexico without crude oil-ingesting organisms? Answer: This question calls for student opinion. However, the Court’s reliance on legislation dating back to the late eighteenth century may be cited as evidence that U.S. law has not evolved quickly enough in response to the rapid pace of scientific and technological progress. 3. Do industrialized nations like the United States tend to expand the scope of IPRs? Why? Answer: This question calls for an opinion from students. It bears to note however that developed states have expanded IPR protections as their economies increasingly rely on technology and innovation rather than heavy industry and manufacturing. Mobile Communications Services, Inc. v. WebReg, RN 1. Would the Complainant have won the case if it could not show that it had an interest in the name Mobilcom? Must all of the elements be shown to get relief? Answer: No. A complaining party must prove that the domain name in question is identical or confusingly similar to a trademark or service mark in which the complaining party has rights; that the responding party has no rights or legitimate interest with respect to the domain name; and that the domain name has been registered and used in bad faith. 2. Is it acceptable to have a business selling domain names? How must such a business show that it creates domain names? Answer: This question calls for student opinion. However, it bears to note that the panel found that WebReg’s business practices were conducted in bad faith in this case. First, the panel concluded bad faith existed in this case due to the use of the domain name to direct users to websites operated by companies in competition with WebReg. Second, the sales price demanded by WebReg from Mobile Communication was grossly excessive in comparison to the cost of registering a domain name. Finally, WebReg had engaged in a pattern of registering domain names to prevent the owners of trademarks from reflecting their marks in the corresponding domain names. 3. How would one show that the company creating domain names was aware of another firm’s use of a dictionary term as a trademark? Answer: As noted by the panel, even a cursory use of search engines would have discovered the registered nature of the Mobilcom name. This failure to conduct even the most rudimentary due diligence may be evidence of bad faith. TVBO Production Limited v. Australia Sky Net Pty Limited 1. How difficult would it have been for plaintiffs like TVBO to find out who was stealing and rebroadcasting its signal? Answer: Increasingly difficult as the contorted chain of piracy in this case demonstrates. Subscribers to Australia Sky Net’s services were able to view the series in Australia as a result of the retransmission of programs available in Taipei, Taiwan to the east coast of Australia via satellite. The satellite’s transponders downlinked the signals into Australia, and certain subscribers were able to view these downlinks utilizing technology that permitted them to unscramble the broadcasts. 2. How would an Australian court enforce its jurisdiction over a foreign copyright infringer? Answer: The intentional broadcasting of the pirated program into Australia may serve to permit the Australian court to exercise jurisdiction over the foreign pirate. However, it is one thing to exercise jurisdiction – it is another more difficult question to actually enforce resultant court orders against a foreign infringer. 3. If it were difficult to trace this type of piracy, would it be worthwhile for the pirate to continue? How would a court system discourage this type of piracy? Answer: This question calls for an opinion from students. However, the contorted chain from which the court traced the copyright piracy in this case may be cited as support for the notion that piracy may under many circumstances pay. Piracy under such circumstances may only be discouraged through enhanced enforcement efforts and penalties. Comite Interprofessional du Vin de Champagne v. Wineworths Group, Ltd. 1. The result in this case means that “champagne” is an enforceable IPR in New Zealand and the United Kingdom, but not in Australia, Canada, or the United States. Do you think that the court’s approach was objective or subjective? What does this suggest about trademark law? Answer: This question calls for student opinion. However, it bears to note that, in determining whether the word champagne could be used or whether it infringed a mark, the court was guided by the national understanding of that word. Thus, the court determined what citizens of the nations into which the defendant’s champagne was being imported perceived the word to mean. This suggests that trademark law may be dependent on local perceptions and consumer attitudes. 2. The court reached its decision by reviewing evidence about association between the word champagne and the product from France. Such surveys were organized and conducted by experts for each of the parties. Were these surveys subjective or objective? Whose job is it to determine which surveys are more reliable? Answer: This question calls for student opinion. In this case, the court took it upon itself to determine which surveys were more reliable. The court looked at market research studies that convinced it that “champagne” was not a generic word in New Zealand. It also gave credence to testimony from wine experts and adherence of other members of the common market regarding France’s proprietary right to the word as a method to ensure fair labeling of wine bottles. 3. The Coca Cola Company hires personnel worldwide to assure that when consumers order a “coke,” they are either served Coca-Cola products or are advised that none are available. Why? Answer: The intent of this policy appears to ensure that the term “coke” does not become generic, thus potentially threatening its protected trademark status. A. Bourjois & Co. v. Katzel 1. Certain German automobiles that are regarded as non-luxury in Germany have upgraded options before shipment to the United States, where they are marketed by the U.S. licensees as luxury cars. How would this business model be adversely affected if not for the Bourjois decision? Answer: It is possible that the sellers of German automobiles in Germany would directly export their products to the United States without the upgraded options and advertise them as luxury models, thus obtaining a free ride on the existing reputation of these automobiles in the United States and quite possibly damaging such reputation over time. 2. How does the protection afforded by Bourjois hurt U.S. consumers? Answer: It may serve to deprive them of an equivalent product at a cheaper price. 3. If the Bourjois protection were not afforded, what would this mean for U.S. licensees of products from outside of the United States? Answer: Such licensees would face the prospect of importation of similar products into the United States derived from the original licensor possibly at a cheaper price. This would serve to deprive such licensees of the benefit of their bargains with their licensors. CSU et al. v. Xerox Corporation 1. Is there a conflict between antitrust laws and IPR laws? If so, how can such a conflict be resolved by the legislature or the courts? Answer: There is an inherent conflict, but the constitution clearly grants patent holders the right to exclude, in effect granting a monopoly (for a limited time) because of the desire to encourage innovation. The courts are the interpreters of the constitution while the antitrust law is statutory (and common law interpretations) law that is the province of the legislature. The conflicts have been resolved on a case-by-case basis, but if there is sufficient legislative consensus, the legislature has the authority to make revisions in the existing statutory laws. 2. Should the courts or the legislature impose a duty to license to prevent a company to monopolize a market? Answer: In some countries, legislatures and/or courts have imposed such duties for important national industries. Students likely have differing opinions as to whether such action should be taken in the U.S. in various situations. ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: As already alluded to in the question, if Hirt continues manufacturing its product domestically, it will face higher labor costs that will have to be recovered through either increased price or diminished profits, but Hirt will be assured of the security of their design/manufacture know-how. If Hirt chooses to produce their product abroad, they could either build and manage their own company abroad or outsource to an established foreign manufacturer. Most likely, Hirt’s foreign manufacturing company would be staffed with foreign employees. If Hirt’s know-how is not entitled to IP protection at all, by educating foreign employees in Hirt ways, Hirt could be grooming this collective to become a present-day competitor for its market. 2. Answer: In a joint venture, someone outside the Hirt chain of command would have access to the entire know-how. The holder of the know-how is completely at the mercy of the legal system in protecting its “crowned jewels.” A joint venture would eliminate risks associated with capita investment abroad, but increase risks of piracy or unwittingly developing a competitor for Hirt’s market. Logistically, if the “know-how” referred to qualifies as intellectual property (i.e., it is a patent), Hirt could engage in an IPR transfer to a foreign company for a fee. That company would then manufacture the product and re-export it back to the U.S. This would likely lead to increased income and/or decreased costs for Hirt, but it would also increase the risk of piracy and of creating a future competitor for the market once IP protections expire. 3. Answer: Barthelemy offers Hill an instant marketing base and resources with which to promote his shoes. Further, because Mr. Hill's innovation is patented, he has less to fear from the “tres grande” monster swallowing him up. And Barthelemy is much better positioned in Western Europe, where virtually all of the demand for consumer items like athletic shoes currently exists. Pek's labor cost advantage would only be important if the athletic shoe market is so price sensitive that Pek will be able to grab market share as soon as it enters the Western European market. This would be a bit of a gamble for Mr. Hill. As a newly privatized company, Pek may go bankrupt or disband, leaving Hill with having sacrificed his invention for no profits from this venture. Hill, however, must be aware that in either scenario he opens himself up to the firm researching around the patent and developing a non-infringing alternative to Hill’s design. That firm could then not only diminish profits or expel Hill’s show from the European market, but pose a threat to the U.S. market. 4. Answer: Under the gensoku kinshi system, Japan's regulators have historically tended to slow foreign subsidiary processing to give the Japanese competitors time to catch up with the foreign technological innovation. Under such a scenario, Mr. Hill may wish to get a Japanese joint venture partner to help him “grease the regulatory skids.” Again, because Mr. Hill's invention is patented, he can feel a bit more secure in dealing with his joint venture partner. The downside would be that after a stated period of time, the joint venture partner will probably be able to compete against Mr. Hill. If the innovation is one that is likely to retain much value after the term of the venture, however, it may be a risk worth taking. If, on the other hand, Mr. Hill waited for the subsidiary process, he might get into Japan about the time that his invention has no value. The gensoku kinshi scenario, of course, is historical. Under the relatively new Japanese gensoku jiyu system, the choice would not be so stark. In this new regulatory context, the decision on whether to employ a joint venturer would hinge more on such traditional considerations as knowledge of the local market and quality of local distribution system. Hill may also wish to consider including geographic limitations and field of use limitations in a license along with a confidentiality clause and limitations on assignment. 5. Answer: There are three basic types of regulatory schemes for international IPR transfer. A prior approval scheme is the most intrusive of the three, requiring government approval prior to transfer. These may require that the foreign licensee be permitted to sublicense technical know-how to other national firms, that confidentiality obligations expire at the conclusion of the license, and that licenses are limited to three-five years. The Japanese system, analyzed above, had a prior approval scheme that includes even greater discretion. The gensoku kinshi system discussed in Question #4 was a prior approval system. The analysis should continue along those lines. 6. Answer: Under the Lever Rules, the domestic grantor of the copyright license (or holder of the original copyright) has the right to prevent the gray market good from entering the United States. This is particularly so where the gray market item might be confused with the domestic item and may be damaged by the importation of the item that is of a different or lesser quality than the domestic item. 7. Answer: Geyer must comply with both international and German domestic IPR law. Under Deutsche Grammophon, Geyer would appear to be out of luck. The bonbons are exactly the same product as is being sold in Germany; Geyer is engaging in pure differential pricing. The critical factual difference, however, is that Mr. Joseph is bringing them back from the United States, which is not a member of the Common Market. The Court of Justice decision emphasized the need to remove barriers to trade among EC countries as a policy overriding the protection of intellectual property rights within Member Countries. The policy balancing might very well be different if the country involved were a nonmember. Although the European Court of Justice has permitted re-import among EU countries, the Geyer is not importing from one EU country to another, but from outside the union. Additionally, German law requires that the price of many items be standardized (as under its consumer protection laws, every consumer is protected by being entitled to the same price). INTERNET EXERCISE: ADDITIONAL BACKGROUND Find the WIPO Digital Agenda atwww.wipo.int/copyright/en/digital_agenda.htm. WIPO plans to offer a simplified method to file and obtain international protection for patents and trademarks. This service will be offered over the Internet. Additionally, WIPO also provides dispute-resolution services for those involved in international disputes pertaining to the assignment of domain names (a form of IP). Have students review and comment on these plans. Some organizations have recently advocated and experimented with on-line dispute resolution, where parties engage in the entire dispute resolution process through a chat room-like forum. What are the benefits and detriments to such an Internet-mediated forum for Internet-related disputes? Why might aggrieved parties shy away from this process? Answer: While there are obvious cost and speed benefits of using on-line dispute resolution, one loses the benefits of face to-face contact that offers each party a chance to confront and react to non-verbal reactions of an opponent. The expertise of the decision-maker may not be as great and the value and importance of prior cases may not be as highly regarded. Managerial Implications 1. Answer: (a) France will be required to analyze the issue based on TRIPS, which requires every member of the WTO to abide by the Paris and Berne conventions so that all foreign intellectual property owners receive the same protection as local nationals. TRIPS requires that France, who is a signatory, protect Limited Wilson’s IP rights. (b) Limited Wilson is protected under TRIPS and should consider licensing its trademark to a French company to market its products. The agreement should contain choice of law provisions, compensation/royalties, field of use limitations, and geographic constraints that are favorable to Limited Wilson. 2. Answer: (a) According to a July 2003 report by the State Council’s Development Research Center, the market value of counterfeit goods in China is between $19 billion and $24 billion, which translates into enormous losses for IPR rights holders. The U.S Trade Representative reports that copyright piracy levels in China are as high as 93 percent and estimated U.S. losses due to such piracy range from $U.S. 2.5 billion to $3.8 billion annually. Response from U.S. firms range from withdrawal, to appeal to the WTO, to reliance on on-going diplomatic discussions between Washington and Beijing. (b) China has resolved to address IPR enforcement issues. In October 2003, the Chinese government appointed Vice Premier Wu to head a group designed to help reduce bureaucratic resistance and confusion on IPR enforcement. At the time of admission to WTO, China was in the process of modifying the full range of IPR laws, regulations, and implementing rules, including those relating to patents, trademarks, and copyrights. China had completed amendments to its patent law, trademark law, and copyright law, along with regulations for the patent law. Within several months after its accession, China issued regulations for the trademark law and the copyright law. China also issued various sets of implementing rules, and it issued regulations and implementing rules covering specific subject areas, such as integrated circuits, computer software, and pharmaceuticals. China made a comprehensive review of its IPR laws as part of the first transitional review of China before the WTO’s Council for Trade-related Aspects of Intellectual Property Rights (TRIPS Council) in September 2002. A further review took place during the transitional review before the TRIPS Council in November 2003. Overall, the legal changes made by China are major improvements that move China generally in line with international norms in most key areas. Furthermore, China completed its accession to the World Intellectual Property Organization (WIPO) Internet-related treaties, which entered into force in 2002 despite the fact that it was not obligated under WTO rules to do so. China has also increased prosecution of trademark and copyright infringement cases, which totaled 50,534 cases and 10,559 cases respectively in 2006. In 2006, seizures of counterfeited trademark materials totaled 30.3 million pieces, and 73 million pirated copyrighted materials were seized. Chinese courts have also recognized intellectual property rights in civil actions filed by private entities. Notable examples include the 2005 decisions in Starbucks Corp. v. Xingbake Café Corporation in which the Shanghai Intermediate Peoples’ Court ordered a Chinese company to stop using the name Xingbake, which in Chinese is identical to Starbucks and awarded damages of U.S.$ 62,000 and Burberry, Chanel, Prada, Moët Hennessy Louis Vuitton and Gucci v. Beijing Xiushui Haosen Clothing Market in which the Beijing Second Intermediate Peoples’ Court held a landlord liable for its failure to stop tenants from selling pirated goods. However, as noted by the U.S Trade Representative, enforcement actions remain inadequate, including the number of actions filed, the underutilization of criminal penalties, the lack of criminal penalties for certain types of infringement and the failure to prosecute manufacturers of pirated products. (c) Microsoft and China are 1000-pound gorillas in the global economy and treat each other with a combination of respect and disdain. Microsoft does business in China as “Microsoft China” but it is very risky and the software is subject to theft and piracy. However, Microsoft has invested heavily in China. Microsoft has initiated suits against Chinese computer companies. Of particular note is Microsoft v. Beijing Juren Computer Company decided in 1996.In China’s first computer software infringement case since signing the Berne Convention, the Beijing Intermediate Court ordered Beijing Juren Computer Company to immediately cease its piracy of Microsoft software, pay U.S. $ 53,600 in damages and publicly apologize in nationally-circulated newspapers. Partnering with the Chinese government would present antitrust issues that Microsoft would rather not deal with. 3. Answer: L’Anza should have set forth specific provisions in its distributorship that included the “first sale” doctrine enunciated in Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908), and limited the re-sale of its products, especially back into the United States. L’Anza did not claim that the products were unauthorized but that the sales themselves were unauthorized when the products came back into the U.S. Rather, L’Anza was interested in protecting its marketing and distribution channels. The Supreme Court held that under the Bobbs-Merrill “first sale” doctrine, L’Anza did have the exclusive right to manufacture and/or sell its products on the “first sale.” In sum, this was a contractual matter, not a statutory matter that evidenced a poorly drafted contract but was not a copyright infringement. Ethical Considerations This consideration calls for student opinion. Students may utilize the ethical frameworks discussed in Chapter One’s Ethical Consideration and the discussion of ethics set forth in the text of Chapter Two in answering the questions. From a teleological standpoint, particular focus may be placed on moral relativism and utilitarianism, specifically, whether the scale of the HIV/AIDS pandemic justifies different approaches with respect to medications and what course of actions results in the greatest good for the greatest number. From a deontological standpoint, particular focus may be placed on the categorical imperative and contractarianism, specifically, whether the pharmaceutical companies have acted in a manner which one would hope to become a universal law, whether they have treated those affected by the pandemic in sub-Saharan Africa as having intrinsic value and whether the ultimate outcome is the fairest and most equitable resolution. Chapter 18 Takings and National Controls on Foreign Direct Investment CASES IN THIS CHAPTER INA Corp. v. Islamic Republic of Iran National Thermal Power Corp. v. The Singer Co. ADC Affiliate et al. v. The Republic of Hungary Saudi Arabia v. Nelson W.S. Kirkpatrick v. Environmental Tectronics Corp. Bank of America Nat’l Trust & Savings Assn v. United States Compaq Computer Corp. and Subsidiaries v. Commissioner of Internal Revenue TEACHING SUMMARY With the demise of the Soviet system in Eastern and Central Europe and the concomitant rise in market-based economies and government privatization, opportunities for foreign investment abound. Investment in foreign countries, however, is not without risks. These risks are not confined to the normal risks attendant to any capital investment but also extend to political aspects. When investing abroad, a U.S. company must always be aware that a foreign government may, through nationalization or expropriation, take one’s investment without paying full compensation for that property. Furthermore, although central tax law concepts such as payment on gains, source of income, and credits are seen in many countries, the application of those concepts differ. What may be taxable or creditable in one country may not be in another. Thus, trans-national businesses must not only be conversant in the tax regulations of their own country, but also in those of every country in which they operate. Furthermore, to make doing business in another country profitable, companies must be careful in managing these tax risks and benefits. Additional Background: Planning For International E-Commerce Taxes Historically, the power to tax was connected to the physical presence of assets and activities. The Internet, however, has blurred these lines or separated assets from the source of income, thus deviating from the traditional model. Nevertheless, e-businesses can minimize tax liability by implementing an international tax plan. To address their double taxation, such plans should address three issues: permanent establishment, character of income, and source of income. The first concept, permanent establishment, had been incorporated into tax law prior to the advent of e-commerce. It refers to a fixed place through which the business is carried on and assists in determining whether a country rightly has the power to tax a transaction that crosses its borders. To determine whether a fixed place of business exists, a tax authority will consider what the company owns and where (the asset test), whether the activities of a dependent agent amount to a minimal threshold of activity in the country (the agency test), and the extent of activities in the foreign country (the activities test). The second concept, character of income, determines whether income is of a U.S. or foreign source. A company can control some aspects of characterization through its contract terms (i.e., defining digital products as the sale of copyrights). This aids in avoiding double taxation. The third concept, source of income, also helps to avoid double taxation because foreign taxes are credited proportionally to the foreign income of the taxpayer. If income is from a U.S. source, a taxpayer will obtain no credit. See Jeff Olin, “Reducing International E-Commerce Taxes,” World Trade 64 (March 2001). Additional Background: Cross-Border E-Finance. Although financial institutions can commonly modify their business practices to overcome foreign governmental and legal barriers, the same is not always true regarding the economic barriers to cross-border e-finance. Economic barriers arise where the cost of completing an Internet-mediated cross-border transaction outweighs its benefits, such as where the cost of market access or of constructing the necessary technical infrastructure to support such transactions is significant. Nevertheless, the standardization of European currency (through the euro) has reduced currency risk, increased transparency, and facilitated cross-border transactions. Additionally, several EC Directives encourage e-finance. These include the Directive on Certain Legal Aspects of Electronic Commerce in the Internal Market (1998) and the Directive on a Common Framework for Electronic Signatures (1999). CASE QUESTIONS AND ANSWERS INA Corp. v. Islamic Republic of Iran 1. What, according to Judge Lagergren, is the general rule relating to compensation for nationalization? Answer: The general rule has been to provide for full compensation in the event of nationalization. 2. Judge Lagergren notes that the Iranians had conducted a nationalization. Does he apply the rule of compensation of nationalizations? Did he craft an exception to that rule? Answer: This court considered that in the case of nationalization, “adequate” compensation as opposed to “full” compensation was acceptable. Presumably this can mean a lower measure, such as the book value of nationalized assets, rather than their fair market value. It is important to note that the court’s view of the state of the law is still a distinct minority position. Indeed, one of the judges on the INA Corporation panel filed a separate opinion that objected to the dicta in the majority opinion. Most international tribunal decisions reflect acceptance of the “modern traditional” theory. 3. If Venezuela nationalizes the petroleum industry, what measure of damages would Judge Lagergren apply? Does net book value reward the foreign investor for the appreciation in value of assets due to his entrepreneurial efforts? Answer: Judge Lagergren may apply the standard set forth in the INA case to the extent he finds that Venezuela’s nationalization was large-scale and of a lawful nature. Net book value penalizes foreign investors by failing to reward them for the appreciation in the value of business assets as a result of entrepreneurial efforts. National Thermal Power Corporation v. The Singer Co. 1. Does this decision mean that foreign investors doing business in India cannot choose international arbitration? Answer: No unless Indian law is chosen as governing the transaction. The award in this case was, according to the Indian Supreme Court, not a foreign award pursuant to the Indian Foreign Arbitration Act of 1940. The court stated that unless the arbitral award was a “foreign award” it would not be recognized as final and binding, and the dispute could be re-litigated in India rather than automatic enforcement given on behalf of the Singer Company. An award is not foreign just because the arbitration took place outside India’s borders; since it was governed by Indian law it was a “domestic award.” A foreign award is foreign because it is made outside of India “on an arbitration agreement not governed by the law of India.” 2. What would the result have been if the parties had chosen to have the contract governed by the laws of England and Wales instead of the laws of India? Answer: The results of the arbitration would have qualified as a foreign judgment subject to recognition as the arbitration occurred outside of India utilizing foreign law. 3. Does this result suggest that arbitration leads to faster results than courtroom litigation? Answer: Unfortunately no in these circumstances. In addition to having wasted time, money and effort on an arbitration before the ICC, Singer is now faced with the prospect of protracted litigation in one of the world’s most inefficient judicial systems. However, this case is an anomaly and cannot be used as a general criticism of arbitration, which is usually a more efficient means of dispute resolution. ADC Affiliate et al. v. The Republic of Hungary 1, The measure of damages was quite high because the case was deemed an unlawful expropriation. Why was it unlawful? Would damages have been lower if it had been lawful? Answer: It was unlawful because the expropriation effectively terminated the long-term leases of the investors, contrary to the bilateral investment treaty (BIT). Yes, where the expropriation is unlawful, the damages seek to wipe out all the consequences of the illegal action and return the investor to where it would be if that act had not occurred. If it still owned the property, the property value would have increased and thus that increase is a part of the damages, but the increase would not be a part of such damages if the act was lawful. 2. The panel found damages as of the date of the Award rather than the date of the taking. Why? How can one tell whether to apply the Chorzow date of valuation rule or the rule in this case? Answer: The date of taking is normal, but the date of valuation has to be used here because the objective is to put the investor where it would have been –with the higher value—that is necessary for full restoration of what the investor had—the long term leases. 3. The panel chose the DCF method. Why was that necessary under the circumstances of this case? Answer: it is necessary to consider the remaining term of the leases to determine the value the claimants lost and only the DCF method accounts for this factor. Saudi Arabia v. Nelson 1. Would the Nelsons have had a claim in U.S. courts if the employment contract Mr. Nelson had signed in the United States had expressly agreed not to detain him in the absence of criminal activity? Would such a clause have made his action one for breach of contract? Would that have made a difference? Answer: Possibly. In the absence of a statutory definition, the court read "based upon" to denote conduct that forms the "base" or "foundation" for a claim. This means the elements of a claim that, if proven, would entitle the plaintiff to relief. The Nelson's suit was based on personal injuries as a result of the Saudi government's unlawful detention and torture. The Nelson's allegation about the recruiting and employment do not relate to the elements in a cause of action for personal injury. Rather, they may be relevant to a breach of contract claim. However, subsequent injuries resulting from his detention may be outside the scope of the contractual promise to simply refrain from unwarranted detention. 2. If his Saudi employer had failed to pay him the amounts he had contracted to pay, would Mr. Nelson have been barred from suing in the United States by the FSIA? Would a U.S. court have jurisdiction to hear such a suit? Answer: Nelson’s suit would not have been barred, and a U.S. court could have proceeded with resolution of the claim. This is due to the fact that the allegation would relate not to a personal injury but to a breach of contract claim. As private entities are capable of entering into employment contracts to the same degree as foreign sovereigns, the act of entering into such a contract and performing its obligations are commercial in nature. 3. What would have been the result in the case if Congress had adopted the “absolute” theory of foreign sovereign immunity? Answer: The result would have been the same as Saudi Arabia would be immune from the jurisdiction of U.S. courts for sovereign and public acts as well as those that are private or commercial in nature. W.S. Kirkpatrick v. Environmental Tectronics Corp. 1. In light of Kirkpatrick, should Act of State doctrine ever be relevant in foreign corruption cases? Answer: No unless the litigation seeks to enforce or disaffirm the contract in question. Litigation that simply involves allegations of corruption not central to the outcome of the case and which do not afford the court the opportunity to determine the legality of the underlying contract do not implicate the Act of State doctrine. 2. What is the policy favoring the Act of State doctrine? What policy does Justice Scalia note against it? Answer: The act of state doctrine is a “principle of decision binding on federal and state courts alike” that is based on the concept that the official act of a sovereign state within its own borders is a rule of decision for courts in the United States. However, Justice Scalia’s position is that U.S. courts have a general obligation to decide cases properly presented to them for resolution even if such cases embarrass foreign governments. 3. How would the Act of State doctrine affect an attempt to challenge a Venezuelan government official edict that breaches a commercial agreement to comply with the modern-traditional doctrine? Answer: The Act of State doctrine may serve to bar the litigation. In Kirkpatrick, the U.S. Supreme Court ruled that the doctrine did not apply because the bribing of Nigerian officials was not an official act of state. Such would not be the case in the Venezuelan example as the act in question was an official edict of the government and hence an official act of state. Bank of America Nat’l Trust & Savings Assn v. United States 1. Do U.S. courts accept foreign nations’ designation of a tax as being on “gross” or “net” receipts? Is this second-guessing a foreign judgment? Does the Act of State doctrine apply? Answer: The designation of the taxes in foreign jurisdictions is not directly relevant to the case. Rather, the matter at issue is how these foreign taxes, regardless of how designated, are subject to tax credit status in the United States. The case thus deals with U.S. tax law and does not purport to modify or in manner disregard foreign tax law. 2. Was the foreign law at issue structured like U.S. tax law? Did the court try to re-characterize the foreign tax law so that it could be analyzed in terms of U.S. tax categories? Answer: The foreign tax codes were somewhat different than the U.S. taxation schemes. The court attempted to determine their status as income taxes under U.S. law so it could then determine the application of tax credits. Thus, the court somewhat re-characterizes the foreign tax laws so that it may then determine their fit within the U.S. regulatory scheme. 3. How complicated would tax compliance be for a bank operating in many nations? Why? Answer: Before entering into activities overseas, the investor needs not only to determine what the level of foreign taxes will be on the activities, but also whether the foreign taxes will be creditable on its U.S. tax return. Otherwise, it might be subjecting itself to double taxation. Such questions are complex and require the assistance of accounting and legal professionals. Compaq Computer Corp. and Subsidiaries v. Commissioner of Internal Revenue 1. What standard does a taxpayer have to meet in order to overcome the IRS determination that the transfer prices were not arm’s-length? Does this give the IRS the great benefit of the doubt? Answer: Once the IRS makes the determination regarding allocation, the taxpayer must prove not only that the determination is incorrect, but that it is arbitrary, capricious, or unreasonable. This is a difficult and IRS-friendly burden, but one that is common for challenges to many governmental regulations Next, the taxpayer must demonstrate that the prices charged by the subsidiary are consistent with an arm’s-length transaction. 2. Why was the IRS unable to show that its ruling against Compaq was not “arbitrary and capricious”? Answer: The court found that the IRS had used unrealistic material, labor, and overhead markups in applying its formulas to determine the existence of deficiencies. 3. What does this tell the U.S. investor about playing games with inter-affiliate transfer pricing to avoid taxes? Answer: Exercise considerable caution. Although the IRS was not successful in this litigation, the burden of proof is nevertheless stacked in its favor, and future taxpayers seeking to avoid deficiencies under similar circumstances may not be as fortunate as Compaq. ANSWERS TO QUESTIONS AND CASE PROBLEMS 1. Answer: Whether Keefe is making a majority investment would depend on the precise language and interpretation of the Mexican law then in force. If Mexican law forbade foreign majority investments in the power generation projects, Mexican authorities would be reluctant to approve this arrangement. They would point out that compensation under the partnership agreement had been structured to soak up the lion's share of what would normally be the return on equity during the first twenty years. As to the joint venture's retention of the residual value of the last 15 years, they would point out that the present value of that cash flow is much lower than that of the first 20 years. 2. Answer: If Mexico feels that it has a greater need for high technology companies, it may, like many developing countries, be more lenient in permitting foreign majority ownership. In reality, however, Mexico has a tremendous need for more power generation facilities to provide the infrastructure necessary for industrial development. In the absence of such an infrastructure, it is hard to attract any investment -- including high-tech investments – no matter what concessions the government may be amenable to. Consequently, Mexicans may be more willing to work with Keefe. Ultimately, the willingness of a government to give a foreign investor greater flexibility is a function of its perceived needs at any given point in development. 3. Answer: There are quite a number of financing alternatives for the U.S. firm in such a situation. First, the U.S. firm could enter into a joint venture with a former communist government entity under which the government supplied the necessary plant, capital equipment, and employment force while the U.S. firm contributed technological expertise to modernize the production process and/or marketing expertise to tap Western markets. Typically, however, some significant capital resources will be necessary to implement the “modernizing” changes. Second, the U.S. firm could enter into a management contract with an enterprise in the former communist nation under which it would provide its technological or marketing services for a fee and make no investment at all. In light of the chronic shortages of foreign exchange in former communist nations, however, such an arrangement could be difficult to effect. Third, the U.S. firm could attempt to affect a “project financing” under which a lender will extend credit to the enterprise on the strength of the collateral value of the enterprise's assets, without recourse to the individual investor. In reality, such lending has been quite limited in former communist countries, with the lender demanding to see some equity investment by the U.S. firm as a sign of its commitment. Fourth, the U.S. firm could seek financing from public sources of financing such as the European Bank for Reconstruction and Development, the World Bank, or the International Finance Corporation. If the transaction is structured to involve the export of American goods or services, financing may also be sought from Eximbank. 4. Answer: A U.S. firm that establishes a foreign 100% owned subsidiary should address tax issues relating to: (1) the crediting of foreign taxes against U.S. taxes; (2) the transfer pricing regulations; and (3) foreign sales corporations. More in-depth discussion on these issues is found at pp. 594-600. 5. Answer: As the text notes, there is currently no legislation in Germany that prohibits insider trading. This should principally make the potential U.S. investor more cautious about stock acquisitions in Germany; it should not make him/her feel that one can trade on inside information with impunity. First, trading on inside information still is considered to be a violation of business ethics. A violation of business ethics in a nation where all merchants still belong to a Handelskammer is nothing to be sneezed at. Moreover, the European Community is currently circulating a directive that would prohibit insider trading in all Community nations, including Germany. Once that is enacted in Germany, insider trading will no longer be without legal risk. All in all, insider trading is a bad idea. 6. Answer: Nationalization and expropriation refer to two ways by which private property is taken, and, sometimes, how it is compensated. Nationalization refers to instances where a government acquires an entire industry or type of business and converts it to a government-run enterprise. Expropriation refers to instances where the government takes an isolated item of property and uses it for a public purpose. The former requires full compensation, where as the latter requires something less. Here, the company, along with others like it, is nationalized. Under INA Corp., a minority view regarding the amount of compensation in such instances, Zasada would receive an amount equal to the fair market value of its investment (rather than full compensation) and perhaps some enhancement of it. This might include projected revenues of the factory had Zasada stayed in control. Obviously, this indicates a movement away from the protection of private property rights. Some would argue with vigor, however, that the movement generally has stopped short of the INA Corp. case -- the great majority of arbitration decisions reflect adoption of the “modern traditional” theory. Under traditional theory, foreign property (that owned by foreign investors) could not be taken. Under modern traditional theory, the foreign investor or her property would not be exempt from a governmental taking, but would promptly receive adequate compensation, i.e., fair market value in cash or a cash equivalent. This makes the foreign investor more similar to a local investor, who is subject to eminent domain. 7. Answer: The answer to this question is driven by the compensation theory to which one adheres. A proponent of prompt, adequate, and effective compensation would argue that Costa Azul cannot change until it earns sufficient funds to pay the foreign investor. Indeed, in developed countries, private property is protected from transitory democratic majorities by measures such as the Takings Clause of the Fifth Amendment of the U.S. Constitution. Those who take a “sovereign rights” position would have little difficulty advocating nationalization upon payment of some “adequate” amount by debt payable in local currency. But adoption of the latter position might ruin Costa Azul's economy by drying up foreign investment and credit. The innovative Azuleno might raise the money for nationalization by a stiff progressive property tax. After all, such property taxes are a common feature of developed countries. But a hundredfold tax increase might be viewed as “creeping expropriation”. Note: The embassy of Peru was founded to be exempt from local ordinances in the case of MacArthur Area Citizens Association v. Republic of Peru, 809 F.2d 918 (D.C. Cir. 1987). The Dominican Republic was found to be within its sovereign rights in excluding a private citizen under such circumstances, but to be liable in damages for violating the tour package contract. See Aragonv. Guzman Travel Advisors Corp., 621 F.2d 1371 (5th Cir. 1980) The government of Bolivia was found to be liable to the consulting firm. See Practical Concepts, Inc. v. Republic of Bolivia, 811 F.2d 1543 (D.C. Cir. 1987). 8. Answer: Under the FSIA, the essential nature of the act, rather than its purpose, determines whether it is commercial or not. Government airlines have successfully been sued in the U.S. by passengers under both breach of contract and tort theories. (Sugarman v. Aeromexico, among others.) In those cases, the operations of an airline service were considered essentially commercial in character. Nonetheless, the function of denying or admitting people into a country is distinctively governmental; businesses do not have the power to so, despite operating airlines. One approach to a case like this would be to allow a cause of action based on breach of contract or tort, but not for detention at customs for a reasonable time for governmental purposes. 9. Answer: Since the Cuban Government took all cigar-making concerns and did not target anyone in particular, it was a nationalization. Obviously, a private party could not legally take another's property. It seems arguable that the Cuban nationalization was the source of its post intervention income and, therefore, not a commercial act. On the other hand, if one focuses on Cuba's selling cigars in the international markets in violation of the former owner's trademark rights, it does seem to be a commercial act. Revenues from pre-intervention shipments can be viewed as part of the enterprise that was nationalized. Thus Cuba's right to collect them might be viewed as an attribute of a sovereign act. 10. Answer: Through its airline office, Fromage Vert would probably be conducting sufficient business in the State of New York to give the Southern District jurisdiction over it under New York's long arm (jurisdiction) statute. The Foreign Sovereign Immunities Act would, however, make Fromage Vert immune from jurisdiction unless its action fit into FSIA's commercial activity exemption. In the absence of a treaty, it is doubtful that a court would find the king's expropriation to fall within the exception. If Hartman owns trademarks in the United States for the toys produced in the factory, she might be able to bring action against Fromage Vert, if it tried to sell them in this country. Under Justice White's reasoning in Dunhill, such sales in the United States would not be an Act of State though the expropriation would be. Furthermore, the king's ad hominem attack would deny him the right to expropriate under the modern traditional theory. Thus, Hartman should redouble her efforts to find an international tribunal. 11. Answer: Privatization is simply the transfer of public assets to the private sector. This is not a recent phenomenon. Indeed, as noted in The Transformation of American Law 1780-1860, the practice of granting franchises to private parties to build roads, canals, and mills was a preferred method for the early American state governments to promote economic development of undeveloped portions of the United States. The Oklahoma Land Rush, more than 100 years later, was a particularly colorful example of the practice. Privatization became a cause cèlébre in recent years as the public assets held by the state in formerly communist nations and in Latin American countries simultaneously hit the market. The move to privatization in Latin countries was triggered by the lack of investment capital created by the sovereign debt crisis and the growing recognition that government provided services very inefficiently. The collapse of communism and attempts to replace it with market economies has produced a similar effect in Central and Eastern Europe. 12. Answer: Under the “partial sale” model, the government sells a substantial but non-controlling interest to the outside investor. The predominant characteristic of what we have called the “partial sale” model is that the government retains control of the enterprise. The principal tool of the minority investor in protecting itself against government abuse is through a shareholder agreement that guarantees it certain rights as a minority shareholder. 13. Answer: A trade sale is a true sale of a government entity or set of assets to private parties. The distinguishing feature of this type of privatization is that control over the entity or assets pass out of the hands of the government over to private hands. Where the former government unit provided services, the government can privatize by entering into a management contract with a private firm to perform the services formerly provided by the government. 14. Answer: First, giving shares to future management who are currently government officials helps secure their support for the privatization. Second, lower-level employees will often be asked to make wage concessions to the new private entity. Granting them a share in the enterprise gives them a possible way of recouping their sacrifice if the enterprise succeeds and motivates them to perform so as to make that success more likely. Third, such a transfer makes organized opposition by employee unions less likely. In former communist nations, excluding the workers from ownership of all capital resources still has very unattractive connotations because of their long training in Marxist thought. Placing too many shares in the hands of management is often a bad idea because they are precisely the people that the new investor may want to replace in order to modernize the operations of the former government entity. Similarly, there may be need to reduce the number of employees at the enterprise in order to streamline operations. It is preferable not to have embittered ex-employees as shareholders. In exchange for their shares, employees can give concessions on their employment contracts and on their pension rights. 15. Answer: The concession model of privatization involves the granting of a franchise to a private party to build a project in exchange for the right to collect revenues from that project. There are two basic types of concessions: Build-Operate-Transfer (BOTs) and Build-Operate-Own (BOOs). In a BOT transaction, the right to collect revenues exists for a specified period of time, after which the asset and the right to revenue collection reverts back to the government. Consequently, the term of a BOT concession should be long enough for the investor to recoup its investment together with a substantial profit. In a BOO transaction, the government sells the concessionaire a permanent concession. BOOs are most common in especially risky projects. 16. Answer: Four types of adjustments to regulations that are often addressed in privatizations are: (1) exemptions from taxation, (2) exemptions from the regulatory regime applicable to the particular industry of the entity being privatized, including regulations affecting tariffs, rates of return, and technical standards, (3) grant of the power of eminent domain to obtain public lands, and (4) remittance rights on capital and other exemptions from regulations relating to repatriation of profits and exchange rates. 17. Answer: Ortiz is entitled to prompt, adequate, and effective compensation for the loss of the value of his shares under the “modern-traditional theory” of expropriation. Nationalization and expropriation refer to two ways by which private property is taken and, sometimes, how it is compensated. Nationalization refers to instances where a government acquires an entire industry or type of business and converts it to a government-run enterprise. Expropriation refers to instances where the government takes an isolated item of property and uses it for a public purpose. The latter requires full compensation, where as the former requires something less. Under traditional theory, foreign property (that owned by foreign investors) could not be taken. Under the “modern traditional theory,” the exercise of a sovereign’s power must be: (1) for a public purpose, (2) non-discriminatory, and (3) accompanied by prompt, adequate, and effective consideration. In this case, Bundesbank Freidumia (BF) is the largest commercial bank in the country. Ortiz’s ownership of the majority of the voting stock could in fact be a matter of national security. Outlawing foreign ownership of voting shares would seem to meet the public purpose and non-discrimination tests. So Ortiz should promptly receive adequate compensation, i.e., fair market value in cash or a cash equivalent. MANAGERIAL IMPLICATIONS It is important to know what regulations exist in the penetrated country regarding foreign investment and control. This undertaking does not appear to be in a sensitive sector in which the foreign government would likely have much concern and, therefore, seek to exert significant control. While this is deemed a joint venture, students should also ask how much control will be in the hands of the investors versus the foreign participants. How will this be translated into managerial control and distribution of both profits and risk? This has ramifications for both management and distribution of profits, but also for tax treatment under U.S. and Latvian law. Indeed, issues regarding transfer pricing, source of and allocation of income, and credit for taxes paid will also arise. The Compaq case and the brief “Additional Background” information provided at the outset of this IM chapter may assist students in considering this venture. In light of the significant difference in financial resources between the U.S. and foreign companies, students might also find it prudent to consider currency risks and mechanisms to limits those risks. ETHICAL CONSIDERATIONS This consideration calls for student opinion. Students may deem these takings defensible on at least an individual basis utilizing moral relativism on the basis that courts and arbitral bodies should not second-guess determinations by national and state sovereigns that the taking of private property is appropriate at a given time and under the circumstances. Applying utilitarianism, students may conclude that the greatest good for the greatest number is satisfied to the extent that private property takings are often portrayed as decentralizing economic concentration or preventing exploitation by large businesses for the benefit of the general public (although this statement in and of itself is highly debatable). Applying a deontological framework, students may conclude that these takings violate fundamental rights to private property recognized by the natural school of law and enshrined in national and international instruments such as the U.S. Declaration of Independence, the U.S. Constitution, and the Universal Declaration of Human Rights. Such takings may be further indefensible pursuant to the categorical imperative as no one would wish for the disregard of private property rights to become a universal standard of conduct and, if individuals would object to the taking of their property, they should not be permitted through their governments to take the property of others. A final outcome may be reached through the application of contractarianism, specifically, whether such takings are fair and equitable, especially to the extent they disproportionately impact the poor and politically disenfranchised groups. Solution Manual for International Business Law and Its Environment Richard Schaffer, Filiberto Agusti, Lucien J. Dhooge 9781285427041