INTERNATIONAL BUSINESS TRANSACTIONSProf. Frank Garcia

Fall 2009

INTRODUCTION...................................................................................................3INTERNATIONAL TRADE AND BUSINESS ISSUES.............................................................3

Incoterms as Trade Usage...................................................................................3Commercial Terms...............................................................................................3Absolute/Comparative Advantages......................................................................3Methods of Protectionism....................................................................................4

LEGAL AND REGULATORY SYSTEMS..............................................................................4Customary International Law..............................................................................4Treaties................................................................................................................4Lex Mercatoria.....................................................................................................5

INTERNATIONAL ECONOMIC LAW ORGANIZATIONS.........................................................5Taxonomy of Tariff Structures.............................................................................5General Agreement on Tariffs and Trade (GATT) Treaty.....................................5World Trade Organization (WTO)........................................................................6European Union (EU)...........................................................................................6North American Free Trade Agreement (NAFTA)...............................................7

THE DOCUMENTARY SALE OF GOODS....................................................................7CONTRACT FORMATION...............................................................................................7

The Basic Transaction..........................................................................................7Concerns in the Contract Formation...................................................................7Problem 4.1 – Insulation to Germany...................................................................8Problem-Solving Approach to Contract Issues by Prof. Frank Garcia.................9

CHOICE OF LAW – UNITED STATES............................................................................10Restatement 2d § 187 – Law of the State Chosen By the Parties.......................10Restatement 2d § 188 – Law Governing In Absence of Effective Choice By the Parties................................................................................................................11Restatement 2d § 6 – Choice of Law Principles.................................................11Use of the Forum’s Law by Default....................................................................11

CHOICE OF LAW – EUROPEAN UNION.........................................................................12Convention on the Law Applicable to Contractual Obligations (EEC)/EC Regulation 593/2008..........................................................................................12

CONVENTION ON THE INTERNATIONAL SALE OF GOODS (CISG)...................................12Application of the CISG.....................................................................................12The CISG Applied to Problem 4.1......................................................................13Arguing for the Court in Kansas to Apply the CISG...........................................13Summary of Problem 4.1...................................................................................14

BUSINESS PLANNING................................................................................................15Structuring Contracts........................................................................................15

DISTRIBUTORSHIPS/AGENTS AND THE USE OF COUNTERTRADE....................................15Distributor or Agent...........................................................................................15Termination Issues.............................................................................................15Establishing a Distributorship/Agency in Mexico..............................................16Countertrade – Back to Bartering......................................................................16

LETTERS OF CREDIT.................................................................................................17The Basic Commercial Letter of Credit Transaction..........................................17The Nature of Strict Documentary Compliance.................................................17The Basis of Strict Documentary Compliance....................................................18Voest-Alpine Standard and UCP 600.................................................................18Problem 5.1 – Gold Watch Pens to France.........................................................19

FOREIGN CORRUPT PRACTICES ACT...........................................................................20

Purpose of the FCPA..........................................................................................20Amendments to the FCPA..................................................................................20

INTELLECTUAL PROPERTY LICENSING..................................................................22CROSS-BORDER IP TRANSFERS..................................................................................22

Overview............................................................................................................22IP Protection......................................................................................................22

LICENSING AGREEMENTS – EUROPEAN UNION............................................................24Principles of European Union Law.....................................................................24EU Regulations..................................................................................................25Problem 9.4 – Drill Bit in Germany....................................................................26

LICENSING AGREEMENTS – NAFTA...........................................................................27Overview............................................................................................................27NAFTA-Plus........................................................................................................28

LICENSING INTO LATIN AMERICA...............................................................................28DoJ Antitrust Guidelines....................................................................................28DoJ - Evaluation of Licensing Arrangements Under the Rule of Reason...........29DoJ – Application of General Principles.............................................................31Decision No. 291 – Andean Common Market.....................................................31Problem 3.0 – Licensing to Guatador.................................................................32

FOREIGN INVESTMENT.......................................................................................33DIRECT INVESTMENT................................................................................................33

The Lifecycle Approach to Foreign Investment.................................................33The Operational Code........................................................................................33Restrictions Upon the Establishment of the Foreign Investment......................34

LOCATION OF INVESTMENT.......................................................................................34Überseering BV v. Nordic Construction Company Baumanagement GmbH......34Problem 10.1 – DGInt. in Germany/United Kingdom.........................................35

CODETERMINATION...................................................................................................35Codetermination by Workers in German Enterprises........................................35The Societas Europeae (SE)...............................................................................36

MERGER CONTROL...................................................................................................37Overview............................................................................................................37EC Merger Regulation No. 139/2004.................................................................37

PRIVATIZATION.........................................................................................................39Fundamental Issues...........................................................................................39

INVESTMENT WITHIN NAFTA...................................................................................40TRIMs Regulations.............................................................................................40NAFTA Regulations............................................................................................40Mexico’s New Foreign Investment Law of 1993................................................43

ISSUES CONFRONTING THE ESTABLISHED INVESTMENT...............................................43Currency Exchange Controls.............................................................................43Transfer Pricing.................................................................................................44International Bankruptcy...................................................................................45

PROJECT FINANCING.................................................................................................47Basic Structure..................................................................................................47Advantages/Disadvantages of Project Finance..................................................47Financing Sources.............................................................................................47Risk Identification and Mitigation......................................................................48

DISPUTE RESOLUTION.......................................................................................50FUNDAMENTAL ISSUES AND PATTERNS......................................................................50

Resolution of International Business Disputes..................................................50CHOICE OF FORUM AND JURISDICTION.......................................................................51

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US Forum Selection Approach...........................................................................51US Approach to Jurisdiction..............................................................................51European Union Approach to Jurisdiction.........................................................52

ENFORCEMENT OF FOREIGN JUDGMENTS...................................................................54Common Law.....................................................................................................54Uniform Acts......................................................................................................54

INTRODUCTION

A. INTERNATIONAL TRADE AND BUSINESS ISSUES

Incoterms as Trade Usage Since the ICC is a non-governmental entity, Incoterms are neither

legislation nor part of a treaty. Thus, it cannot be “governing law” of a contract.

It is a written form of custom and usage in the trade, which can be, and often is, expressly incorporated by parties to an international contract for the sale of goods.

Terms can qualify under CISG Article 9(2) as a “usage…which in international trade is widely known to, and regularly observed by,” parties to international sales contracts.

Terms can also qualify under UCC § 1-205(2) as a “usage of trade.”

Commercial Terms The “E” term EXW (ex works) is where the goods are made available to

the buyer, but use of a carrier is not expressly required. The “F” terms FCA (free carrier), FAS (free along side), FOB (free on

board) require the seller only to assume the risks and costs to deliver the goods to a carrier nominated by the buyer.

Free Carrier. Need only notify buyer that “goods have been delivered into the

custody of carrier.” Seller must provide a commercial invoice or equivalent, any

necessary export license and usually a transportation document that will allow buyer to take delivery of goods.

Free on Board. Appropriate only to water-borne transportation. Need only notify buyer that “goods have been delivered on

board.” Risk of loss transfer to buyer when the goods have passed the

ship’s rail. Seller must also clear the goods for export from the place of

delivery and thus must pay any costs of customs formalities and export taxes.

The “C” terms CFR (cost and freight), CIF (cost, insurance and freight), CPT (carriage paid to), CIP (carriage and insurance paid to) require seller to assume the risks and costs to deliver the goods to a carrier, arrange and paid for the main transportation – and sometimes insurance – but without assuming additional risks due to post-shipment events.

Cost, Insurance and Freight. Appropriate only to water-borne transportation. Seller must arrange the transportation and pay the freight costs

to the destination port, but has completed its delivery obligations when the goods are “on board the vessel at the port of shipment.”

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Seller must pay the freight and unloading costs of the carrier at the destination port under the term, but the buyer must pay all other costs, including unloading costs not collected by the carrier.

The “D” terms DAF (delivered at frontier), DES (delivered ex ship), DEQ (delivered ex quay), DDU (delivered duty unpaid), DDP (delivered duty paid) require the seller to deliver the goods to a carrier, arrange for their transportation, and assume the risks and costs until the arrival of goods at an agreed country of destination.

Absolute/Comparative Advantages Absolute advantage is the common reason why two countries engage in

trade; i.e., one country produces a better product than the other. Westia has an absolute advantage in producing garments (1/2 day/yd vs. 5 days/yd in Tropica).

Comparative advantage is about specializing in what you are least inefficient in producing. Westia should focus on garments (10x more efficient) and Tropica should focus on producing wine since that is their least inefficient production.

Methods of Protectionism Tariffs; ad valorem taxes; calculated as a percentage of the cost of the

good. Attractive because they are a source of revenue; doesn’t appear to

be a direct tax upon the population although it is since manufacturer will just incorporate the tariff into the price.

Tariffs are also invisible; citizenry isn’t necessarily aware. International business actually prefers tariffs because they are more

visible for negotiation and/or discussion. Quotas; numerical restriction on imports.

Doesn’t affect the price in the same manner; however through the operation of supply/demand the price will be driven up.

Premium from the quota goes to the producers’ pocket, not the governments.

Governments can create auctions to divide quotas. Economists discuss a balancing point where same level of protection

achieved through tariffs or quotas. By and large illegal under international trade laws.

Currency valuations; devaluing currency to increase exports, decrease imports.

Devaluing currency is not popular in the international markets. Non-Tariff Barriers.

Labeling requirements; product safety standards. Subsidizing domestic industries; artificially reduces cost of

production. Customs requirements; discrete restrictions through logistics.

Import Substitution Development policy where the country focuses resources to

industries dominated by imports; prohibit certain categories of imports to encourage domestic development and production.

Not always risk free; competition can often drive development.

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Need human capital, technology, and a sufficient domestic market.

Policy has generally failed in Latin America.

B. LEGAL AND REGULATORY SYSTEMS

Customary International Law Over a period of time, a customary practice may be so continually

practiced and accepted that it becomes a de facto law (opinio juris). Not as prominent as treaties because enforcement requires a historical

examination of usage. Foreign investments are often covered by customary international laws.

Expropriation and compensation (often covered in treaties).

Treaties Treaties may be seen as “self-executing,” in that merely becoming a

party puts the treaty and all of its obligations into effect. EU treaties are unique in that they often do apply to European

citizens. A “dualist” system understands domestic law and international law

to be two separate systems and it is a constitutional issue as to how and where international law will apply.

In contrast, many European laws have provisions that it is illegal to violate an international law through a domestic regulation.

Other treaties may be non-self-executing and require “implementing legislation” – a change in the domestic law of a state party that will direct or enable it to fulfill treaty obligations.

It is the change in the domestic law that has effect – not the treaty itself.

An example of a treaty requiring such legislation would be one mandating local prosecution by a party for particular crimes.

If a treaty requires implementing legislation, a state may be in default of its obligations by the failure of its legislature to pass the necessary domestic laws.

Assume that treaties create rights and obligations only for the states to it, not to private parties within a state.

For treaties without direct effect provisions, treaties often set the framework for domestic regulations (i.e., the WTO does not set forth customs laws but rather only sets forth things that states can and cannot do).

Treaties often set up dispute resolution mechanisms but are usually only available to states, not to private parties!

Lex Mercatoria Mercantile custom; not necessarily reflected in any official regulations.

Independent private legal system. Often drafted to accommodate and incorporate the customs and usages

of the trade. Can be codified and/or incorporated by reference into legal documents

and given effect in legal systems. Examples include the Uniform Customs and Practices (UCP) and the

UCC. May come up in arbitration, where the arbitrators may choose to

disregard a national law (the arbitrator, when in his discretion, finds that neither nations’ law should apply, may determine to apply lex mercatoria as the governing law of the dispute).

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C. INTERNATIONAL ECONOMIC LAW ORGANIZATIONS

Taxonomy of Tariff Structures Free trade agreements – FTA

Commits to zero tariffs. Customs union – CU

Similar to free trade agreements but adds a common external tariff (CET).

Creates a single customs area with the same tariff rate. Common market – CM

Aims to establish an integrated economy in goods, services, labor and capital.

Economic community – EC Adds in a further level of macroeconomic policy (i.e., agricultural

policies). Economic union – EU

Adds a common currency and common fiscal/monetary policies. Towards creating a national economy on a regional scale.

The deeper integration, the more sovereignty each member state must give up to central institutions.

General Agreement on Tariffs and Trade (GATT) Treaty Negotiated post-WWII and went into effect in 1947. Drafted in response to trade freeze of the Great Depression (to promote

trade liberalization policies, i.e., reduction of tariffs). Views international law’s role as facilitating the coordination and

cooperation of trade. Advantageous to economists; distorts efficient allocation of resources.

Also skews a country’s comparative advantage. GATT was supposed to be part of the International Trade Organization

(ITO), but it never went into effect because of changing political climate in the United States.

Executive branch still entered into the GATT. GATT became a set of core trade rules with no organization to

enforce them.

The Core Provisions GATT Article I

Article I is the “most favored nation” status; preferential treatment.

Specific commitment to other countries to give them the same treatment that you give to your most favored nation.

Promoted trade liberalization, but creates the “free rider” problem where everyone benefits from one favorable treatment.

Article III Article III is the “national treatment” provision, which requires a

state to treat foreign goods in the same manner the state treats domestic goods.

Plugs the gap for wily nations who try to circumvent the MFN requirements by leaving the tariff alone but including a tax on foreign goods.

World Trade Organization (WTO)

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Created in 1994 during the Uruguay round through the WTO Agreement.

In order to join the WTO, a state must agree to a wide treatment of treaties.

Cannot sue as a private party for a violation of a WTO provision – only btw governments.

However, there is a mechanism (§ 301) can force the government to bring an action for the alleged trade violation.

No private remedies; and should the offending state refuse to comply with the WTO provision, only remedy would be a sanction by your government on the state’s products.

The Core Provisions of the WTO Agreement Annexes I-IV (IA/B/C set the framework for which your client will be

operating). Annex IA is the 1947 GATT Treaty along with several other

agreements. Annex IB is the GATS; general agreement on trade and services. Annex IC is the TRIPS Agreement; trade related IP rights. Annex II is the DSU; dispute settlement understanding. Annex III is the TPRM; trade policy review mechanism. Annex IV is the Plural-lateral Agreements; for specialized

industries.

European Union (EU) Originally created a tripartite system.

The European Community handles the common markets – supranational.

One branch handles justice and home affairs – intergovernmental. One branch handles common foreign and security policy –

intergovernmental. Deep security rationale for creating union through economic

integration. Deregulatory project – focused on creating strong central institutions.

Ability to create binding legislation beyond a state’s veto power. Supremacy and direct effect. Community institutions can only act within the power allocated to

them.

EU Institutions European Council

One country, one chair representation. Presidency of council rotates among the members. Membership depends on the subject matter being discussed, i.e.,

a transportation issue would be discussed by the members’ transportation ministers.

Enacts legislation. European Commission

Initiates legislation. Operating in the best interests of the community, not individual

member states. European Parliament

Directly elected representatives; seats allocated according to population.

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Role has been enlarged to represent constituents; co-decision role.

Parliament has no independent legislative power. European Court of Justice

Has a policing role within the branches of the system itself. Provides court for intra-community disputes and enforcement. Article 234 – preliminary reference process* Community law enforcement and adjudication can be brought in

the courts of any member state. Functions as the “supreme court” on matters of community law

only. European community law is available to private parties.

European Community Law Regulations

Similar to statutes – primary legislative output. Binding on member states without need for further

implementing legislation. Directives

More open-ended – only binding as to outcome. Commands to member states to enact national legislation to

accomplish outcomes of directives. All EU legislation must be based in a treaty provision. Gives individual member states some leeway to going about

setting up system – goal is mandated, not method of accomplishment.

Treaty Provisions Can be law if they have direct affect. Written in such a way that they are adequate for creating rights,

privileges, obligations, and responsibilities.

North American Free Trade Agreement (NAFTA) Technically a free trade agreement but it also addresses issues all the

way down the list. For example, it addresses goods, services and capital but does not

promote the free movement of labor – in fact it is anti-free movement of labor.

United States has traditionally been, and still is, rather reluctant to transfer any sovereignty to an international organization.

Facilitates and protects foreign investments. NAFTA law is just background law that sets the framework for

Canadian, US and Mexican legislation.

The Core Provisions of NAFTA Chapter 11 covers foreign investment and establishes a binding

arbitration procedure for disputes between a private party and a government.

Chapter 19 covers US/Canada trade agreement provisions and provides for bi-national review panels for impartial appellate proceedings.

THE DOCUMENTARY SALE OF GOODS

A. CONTRACT FORMATION

The Basic Transaction

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The transaction in five stages: (i) contract formation, (ii) letter of credit, (iii) shipment, (iv) payment and (v) delivery.

Transactions present the risk of nonpayment, risk of fraud, non-conforming goods, loss or damage in transit, currency fluctuations, confusion over choice of law, customs formalities, insolvency of one party, language misunderstandings.

International trading community has sought to avoid large and uncertain risks by creating devices, which break them down into many small and measurable risks.

Accomplished through the (i) sale contract between buyer and seller; (ii) letter of credit contract (confirmed irrevocable negotiable loc) between buyer’s bank and seller; and (iii) bill of lading between seller and carrier.

Concerns in the Contract Formation Parties generally follow the provisions under Article 14 of the CISG.

Form 2 would be the bid/offer and Form 3 would be the acceptance. Incoterms involved regarding shipping (FAS, C&F, CIF) provide a

degree of clarity as to the rights and obligations of the parties involved. Could find benefits in taking products further along the delivery

chain, such as padding the shipping costs. Also gives the seller a greater amount of control over the

transaction and build in profit through each link in the chain. Why 110% insurance coverage? Transaction presupposes that the goods

are to be sold and thus builds in a profit component for the buyer. When requesting a LC transaction, the shipment terms must be CIF.

Buyer’s bank would have to see that the Seller has paid for all the required fees/costs.

Terms on the letter of credit must strictly comply with the terms of the credit.

Payment is made “against the documents.”

Problem 4.1 – Insulation to Germany Universal gives Euro’s agent a standard price list for its products that

specifies “$200 per 100lbs, EXW Plant, Kansas City.”

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One month later, Euro sends Universal a “purchase order” for “5,000lbs of insulation for $10,000 EXW Kansas City for immediate delivery to Darmstadt, Germany. Euro.”

Same day, Universal responds by faxing a “order acknowledgment form” to Euro’s office stating, “We accept your order to buy 5,000lbs of insulation for $10,000 EXW Kansas City. Goods sold as is and with all faults (UCC 2-316). Contract is governed by the laws of Kansas.”

Initial Issues Was a contract ever formed? (UCC 2-207 v. Germany’s “mirror

image” rule). Was Universal’s price sheet an offer or an invitation to bid?

What contract law should we apply to the problem? If Euro’s first transmission of the purchase order was an offer and

Universal’s acknowledgment was an acceptance, what effect does Universal’s additional terms have?

All events above occur and within a week Universal ships the goods and bills Euro. Euro accepts the goods and pays for them.

The pipe insulation reacts negatively with the Euro pipes and causes it to corrode.

Secondary Issues If not previously, has a contract been formed now?

Under the UCC performance can complete a contract. Under mirror image rule, the last offer on the table controls

(“last shot rule”). Party accepting the goods accepted the last offer on the

table.

Problem-Solving Approach to Contract Issues by Prof. Frank Garcia1ST. IDENTIFY POSITION IN THE DISPUTE.

Defendant facing potential liability.2ND. IDENTIFY MEANS AND GOAL.

Goal is to avoid potential liability. What means are available to avoid liability?

Plan A → There is a disclaimer in the contract and that the disclaimer is effective in the applicable jurisdiction.

Plan B → Damages are not available for this type of claim. Plan C → No breach of warranty. Two basic types of warranties;

warranty of merchantability (product is good and reliable example of its type of product and will perform associated types of functions) and warranty of fitness for a particular purpose (if the merchant has reason to know what you are using the product for, then the product must do what it was promised it would do).

i.e., this type of insulation is perfectly situated for the application it was designed for and the problem was the metal composition of the European pipes.

Whether there is a disclaimer is a matter of contract formation law whereas whether the disclaimer is effective is a matter of warranty law.

3RD. DETERMINE WHICH LAW WOULD BEST ACHIEVE YOUR GOAL.

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Cannot objectively search through choice of law analysis; must do so purposefully to achieve the desired goal – i.e., enforce disclaimer and/or avoid liability.

Kansas Law § 2-206. Offer and Acceptance in Formation of Contract.(1) Unless otherwise unambiguously indicated by the language or circumstances (a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances: (b) an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods, but the shipment of nonconforming goods is not an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer. (2) If the beginning of a requested performance is a reasonable mode of acceptance, an offeror that is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. (3) A definite and seasonable expression of acceptance in a record operates as an acceptance even if it contains terms additional to or different from the offer. § 2-207. Terms of Contract; Effect of Confirmation.Subject to Section 2-202, if (i) conduct by both parties recognizes the existence of a contract although their records do not otherwise establish a contract, (ii) a contract is formed by an offer and acceptance, or (iii) a contract formed in any manner is confirmed by a record that contains terms additional to or different from those in the contract being confirmed, the terms of the contract are: (a) terms that appear in the records of both parties; (b) terms, whether in a record or not, to which both parties agree; and (c) terms supplied or incorporated under any provision of this Act.

Offer was purchase order; acceptance was order acknowledgment.

Deviant acceptance is still an acceptance. Comment 4 and 5 to UCC sections; disclaimers of liability

change a material term of the contract. If construed as an additional term, then the disclaimer falls out which is bad for our party – court fills in appropriate language.

Could argue that every contract presumes a warranty of merchantability and then the disclaimer is a different term.

If different term, they cancel each other out and court fills in law, which includes an implied warranty of merchantability.

What about provision that states, “Contract is governed by the law of Kansas.”

Is that a materially altering additional term? Surprising to other party? Yes.

It would materially change the effect of the disclaimer; it falls out.

Also defeats our goal since the disclaimer would fall out as well.

German Law Mirror image rule + last shot doctrine → the disclaimer is in. Performance as a method of acceptance.

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Thus we want German law to apply to this claim. Under UCC § 2-207, the courts can find parties had a

contract through performance. Blockbuster acceptance. See comments to § 2-207, 1

through 3.

4TH. IDENTIFY THE ARGUMENTS UNDER THE RELEVANT CHOICE OF LAW RULES FOR PROVIDING THE BEST CHANCE OF SUCCEEDING IN GETTING THE LAW IDENTIFIED IN STEP THREE.

If party is a defendant (as here), it must anticipate what forums might be sued in – here it would be Kansas or Germany.

For choice of law rules for Kansas – R.2d of Laws § 6 and § 188 – would also need to know whether the supreme court of Kansas/legislature has adopted the restatement language.

§ 187 basically states the principle of party autonomy – allows the parties to make their own choice. But it doesn’t tell you what to do if unsure if both parties have not agreed to choice of law.

EU created a treaty between the member states for a single set of choice of law rules.

Only available now as a regulation to apply to domestic laws.

B. CHOICE OF LAW – UNITED STATES

Restatement 2d § 187 – Law of the State Chosen By the Parties (1) The law of the state chosen by the parties to govern their

contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.

(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.

Enshrines principal of party autonomy but also gives courts latitude to search through the evidence to determine if the parties had a choice of law in mind.

Comment a. Rule is inapplicable unless it can be established that the parties have chosen the state of the applicable law.

If §187 is out, you would have to choose the body of law to determine whether or not the choice of Kansas law is effective.

Could interpret that § 187 cannot apply (no choice made) – per se ineffective choice.

Then we move on to limited § 188 analysis.

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Restatement 2d § 188 – Law Governing In Absence of Effective Choice By the Parties (1) The rights and duties of the parties with respect to an issue in

contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.

(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:

(a) the place of contracting, [reference to forum’s contract law]; (b) the place of negotiation of the contract; (c) the place of performance; (d) the location of the subject matter of the contract; and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. [These contacts are to be evaluated according to their relative importance with respect to the particular issue.]

(3) If the place of negotiating the contract and the place of performance are in the same state, the local law of this state will usually be applied, except as otherwise provided in §§ 189-199 and 203.

Can use law determined under § 188 to fill in the gaps for issues remaining under § 187 choice of law analysis.

Using § 188 to select a body of contract law in order to work on the choice of law analysis.

Only to determine which jurisdiction has the most significant contacts with respect to this issue alone (i.e., what contract law will I use to determine whether choice of law language is valid and included in the contract).

In our example, we would want § 188 to result in Kansas law being used to knock out the choice of law clause. § 188 allows us room to argue.

Application of the Principles. Under (a), Kansas follows the mailbox rule and the place of

contracting is the place from which the last communication (acceptance in this case) is sent. Thus it is Kansas.

Says (b) doesn’t really apply since it was just an exchange of documents from a distance.

Under (c), where did Universal perform? Under the EXW term, the place of performance of the seller is Kansas.

What about Euro’s performance? Rule in Kansas is that payment occurs in the place where the seller’s account is credited. We’ll assume it is a bank in Kansas.

Under (d), what was the location of the subject matter of the contract? Usually applies when dealing with things like fixtures. If it did apply, we would assume it would be Germany since that is where the goods are going to be installed.

Finally, under (e), it would be a wash since we have a party in Kansas and Germany.

Restatement 2d § 6 – Choice of Law Principles (1) A court, subject to constitutional restrictions, will follow a statutory

directive of its own state on choice of law. (2) When there is no such

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directive, the factors relevant to the choice of the applicable rule of law include:

(a) the needs of the interstate and international systems; (b) the relevant policies of the forum; (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue; (d) the protection of justified expectations; (e) the basic policies underlying the particular field of law; (f) certainty, predictability and uniformity of result; and (g) ease in the determination and application of the law to be applied.

We would have to argue why the above factors weigh in favor of applying German law.

Use of the Forum’s Law by Default This was the rule under the first restatement. Use the law of the place

of contracting – forum’s contract law to determine where the contract was formed – See Comment e to § 188.

Could shape litigation by choosing a particular forum. In our example, the result would be to use Kansas law which would

knock out the choice of law clause which is good.

C. CHOICE OF LAW – EUROPEAN UNION

Convention on the Law Applicable to Contractual Obligations (EEC)/EC Regulation 593/2008 Article 3 . A contract shall be governed by the law chosen by the parties.

The choice must expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case.

The existence and validity of the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of Articles 8, 9, and 11.

Article 4 . To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected.

It shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporated, its central administration.

Article 8 . The existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under [this convention] if the contract or term were valid.

Nevertheless, a party may rely upon the law of the country in which he has his habitual residence to establish that he did not consent if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the law specified in the preceding paragraph.

Application to Problem. If contract or term of contract were valid under Kansas law, under

Article 3 it would be the law of Kansas to determine if the choice is valid.

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You would use the law they tried to choose to determine if their choice of law was valid – give party the benefit of the doubt in the choice they tried to make.

Section 3 of Article 4 allows one to argue that the contract is “manifestly more closely connected” with Germany than Kansas.

If case is tried in Germany, Kansas law would apply given the Articles above and thus Universal would lose the disclaimer as well.

D. CONVENTION ON THE INTERNATIONAL SALE OF GOODS (CISG)

Application of the CISG In the United States, the CISG is considered a self-executing treaty, so

no domestic, federal legislation was enacted, or is necessary. It thus has the effect of federal law, preempting all state uniform

commercial codes unless the parties to the contract have agreed otherwise (i.e., parties “opted out”).

Parties need to specifically state that contract is not governed by the CISG but that it is governed by the UCC as adopted by Kansas.

Article 1 . This convention applies to contracts of sale of goods between parties whose places of business are in different states: (a) when the states are contract states; or (b) when the rules of private international law lead to the application of the law of a contracting state.

The United States declared a reservation under Article 95 and therefore is not bound by Article 1(1)(b) – i.e., if action is filed in US, and the choice of law points to the US, then the US law applies, not the CISG).

Germany made a statement that parties (i.e., the US) who made a declaration shall not be considered a contracting party to the CISG.

The only Article 1(1)(b) situations arise with one non-contracting party to 3-way transaction.

If parties are the US and Germany, then you involve the reservation. If case is filed in US and choice of law points to Germany, then

German law applies because the US made the reservation.

Case Filed In

Choice of Law United

States

Choice of Law

Germany

Choice of Law

XanaduUnited States

US [no 1(1)(b)]

Germany Xanadu

Germany US Domestic[b/c

declaration]

CISG Xanadu

Xanadu US Germany Xanadu

The CISG Applied to Problem 4.1 Must first ask whether we want the parties to have opted out of the

CISG or not. What does the CISG do to the disclaimer?

Article 19 . (1) A reply to an offer which purports to be an acceptance but contains additions, limitations, or other modifications is a rejection of the offer and constitutes a

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counteroffer. (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. (3) Additional or different terms relating, inter alia, to the price, payment, quality or quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

Disclaimer as a materially altering term? If so, it became a counteroffer, which was accepted through Euro’s

performance! Article 19 of the CISG is essentially an adoption of the mirror image

rule.

Conflicting Terms Existence of conflicting terms creates a gap that the court can fill by

recourse to Article 7(1)’s principle of good faith (“knock out rule”), it can accept that the terms provided in the acceptance control (the “second shot rule”), or it can incorporate the terms of the last communication (the “last shot rule”).

Arguing for the Court in Kansas to Apply the CISG Must first go through Article 1(1)(a) analysis and determine whether

the language was effective for an Article 6 opt out. Question of whether or not Kansas law applies is replaced by whether

or not the parties have opted out. Two Approaches.

Use the CISG’s own formation rules to determine whether the parties have opted out of the CISG (i.e., argue that choice of law clause is a materially altering term – turns it into a counteroffer which Euro accepted by performance).

Article 7 states that the convention is to promote uniformity and good faith.

Conformity with the law applicable by virtue of the rules of private international law.

Choice of law question – an issue under § 187 – have the parties opted out is the same as have the parties made an effective choice of law. Under this approach the opt out fails and that is good for the defendant.

If Case is Filed in Germany? CISG approach – same analysis and that is bad. Choice of law approach – CISG Article 3/8 – using Kansas law to

determine whether Kansas law was chosen is good because the opt out fails and the CISG applies.

Summary of Problem 4.13RD. DETERMINE WHICH LAW WOULD BEST ACHIEVE YOUR GOAL

CISG Article 1 jurisdictional analysis. Modified mirror image rule.

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Deviant acceptance is an effective acceptance unless it materially alters the offer; terms don’t fall out but the entire acceptance becomes a counteroffer.

Order acknowledgement is a counteroffer – Euro accepted by performance → disclaimer is in and that is good.

Kansas Deviant acceptance rule – altering term falls out and that is bad.

Germany Mirror image rule – counter offer – acceptance through

performance; disclaimer is in and that is good.

4TH. DETERMINE HOW TO ARGUE FOR APPLICATION ON THE LAW WE WANT.

We know the CISG applies – Article 1(1)(a). One of the two documents has language, which purports to be a

choice of law language – but is it sufficient to opt out of CISG? Language already in the book has already been determined to be

ineffective for opting out – law of Kansas is the CISG, etc.. We now assume that the language stated, “this contract is

governed by the UCC of Kansas and is not subject to the CISG.”

Case is Filed in Kansas Use the CISG approach → choice of law clause is in so the

parties have opted out of the CISG – thus, Kansas law applies. You’re under the CISG until you determine that you’re not.

Under Kansas law the disclaimer is out which is bad. Using contract law to determine whether the COL clause is in –

if it is then Kansas law applies because they opted out of the CISG.

Referencing the CISG language and the general principles on which it is based to determine whether opt-out succeeds or not.

Straight forward choice of law approach → Article 7 of the CISG. How would the court analyze it under its own COL rules (i.e.,

§ 187)? Could be per se ineffective – no choice of law and if so, then

the CISG applies [Garcia thinks bad approach]. Use § 188 in limited sense to determine most significant

relationship for analyzing the choice of law clause Forum’s contract law (Kansas) – the COL is out and the CISG

applies. Case is Filed in Germany

CISG approach → COL clause is in and Kansas law applies which is bad.

COL approach Because it is a German court, the EEC articles apply. Article 3 → have the parties made an effective choice? Article 8/10 – When the existence of a term is in question,

you use the law which would apply under the regulation to determine whether the term exists or not (i.e., you use the law that would apply if the term exists to determine if the term exists).

Use Kansas law to determine whether Kansas law would allow the choice of law clause – COL is out and the CISG applies which is good.

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E. BUSINESS PLANNING

Structuring Contracts Have important terms/provisions specifically negotiated and bargained

for. Could be problematic for seller’s sales team; time consuming;

appearance of not standing behind product. Blockbuster offer/acceptance (expressly conditioned on certain terms, §

2-207). If both parties have it and perform, no contract is formed on

documents. Can have order processing people flag problematic acceptances. Any commercial method for risk spreading, limitation of liability rather

than disclaimer.

F. DISTRIBUTORSHIPS/AGENTS AND THE USE OF COUNTERTRADE

Distributor or Agent The Independent Foreign Agent.

A person who does not take title to the goods and who is usually paid in some combination of salary and commissions.

Risk of nonpayment remains with the US supplier. Does not have power to bind US supplied unless considered to have

been implied. Laws of the agent’s nation may regulate the nature of the agency

relationship substantially more than is the practice in the United States.

The Independent Foreign Distributor. Buys the US supplier’s products and resells them through his own

distribution network. Risk of nonpayment is transferred to the distributor. Language of distribution agreement should be clear as possible in

noting the nature of the principal-principal as a substitute for the principal-agent relationship.

Foreign laws applicable to distribution agreements are usually designed to: (i) benefit local agents/distributors, especially in the area of termination; (ii) restrict or prohibit the use of agents/distributors, essentially to protect the public from unfair agents/distributors; and (iii) apply domestic labor law to the distribution agreement in addition to any special laws applicable to the distribution agreement.

Anti-trust laws in countries might be enforced against distributors but not agents.

Use of a distributor might also result in decreased control, such as determining price, marketing, sales areas, etc…

Termination Issues It is vitally important to know the termination laws in nation where

distributorship proposed. Right to Terminate . If restrictions on termination are imposed, they

usually nevertheless allow termination for just cause. Some nations do not allow termination at will and may not even

approve a fixed term.

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Inappropriate notice may be treated as termination without just cause.

Parties should consider actions that immediately terminate the agreement.

Termination for unsatisfactory performance usually requires some notice and may require an opportunity to have a second chance after renegotiation.

Notice of Termination . Host nation may have laws requiring notice not only to the agent/distributor but also to a government office, along with specifics for delivering notice.

Rights Upon Termination . Where termination is without just cause, rights may be extensive.

Usually includes some of monetary settlement. Agent/Distributor may have to be paid any goods in possession, for

any goodwill established by the agent/distributor, for any promotional expenses assumed, and for any other expenses or investments made during the time of the agreement.

Waiver of Termination Rights . The laws or public policy of the country may reject any waiver of rights because the agent/distributor is presumed to have little bargaining leverage.

Denial of Import Privileges . If the process to determine the compensation of a terminated agent/distributor is continuing, the principal may be denied any further rights to import into the country and may not simply shift the distributorship to another party.

Denial of Export Privileges . The US party should include a provision that allows suspension, or possibly termination, of any obligations to provide products to fulfill orders, when the US government imposes restrictions on exports for any reason.

Particularly important for agency agreements when orders are placed directly to the US supplier rather than with sales from the supply of the foreign distributor.

Establishing a Distributorship/Agency in Mexico The Use of a Broker or Intermediary (Corredor/Mediador).

The broker’s purpose is to put a potential buyer in touch with the seller for which he will receive a fee for his service.

Broker does not act as a legal representative or employee and do not have any power to bind the buyer or seller – they merely act as a bridge between the two.

The Use of an Agent (Comisionistas). Agents are subject to the rules of attorneys-in-fact (mandatarios).

The contrato de comisión is regulated under an old commercial code.

Treated as a non-permanent relationship – can be revoked. Can be open or secret. Mexico generally has no protection for agents or distributors.

The CISG, if a party to it, sets out rules governing authority of appointment of contracts.

Distribution agreements are not recognized under the laws of Mexico. US supplier may have trouble dictating where and for how much

product may be sold. Mexico created a federal commission on competition (SECOFI),

attempting to protect competition and prevent monopolies, monopolistic practices and other restrictive acts affecting the free trade of goods and services.

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Countertrade – Back to Bartering Countertrade presents many burdens upon the outside company,

including quality and marketing concerns for the exchanged products. Because it may be difficult to determine what price countertraded

products are obtained for, it may be difficult to conclude whether products are being “dumped” when sold.

Many argue that countertrade is problematic – “when you countertrade you get an inefficient allocation of resources. Every time a company takes back goods that a purchasing country cannot sell in international markets, you have introduced coercion into the system.”

Counterpurchase Arrangement In such an arrangement, a private firm agrees to sell products to a

sovereign nation and to purchase from the nation goods that are unrelated to the items that it is selling.

Each party is paid in currency upon the delivery of its products to the other party.

Private firms will often resell the countertraded goods at a discount, seeking to offset this loss by larger profits generated by the sale of its own product to the nation.

Compensation Arrangement The most common arrangement and referred to as compensation or

“buy-back,” where a private firm will sell equipment, technology or even a turn-key plant to a sovereign nation and agree to purchase a portion of the output produced from the use of the equipment or technology.

The products acquired are frequently of marketable quality and in demand in the international market, allowing the firms to earn a profit reselling said products.

Switch Trading A device used to balance a bilateral clearing agreement. In a

bilateral clearing arrangement between X and Y, X may have taken more products from Y than Y has taken from X. In this instance, Y will have a “credit” in its clearing account.

In the switch trade, Y will located a third party interested in purchasing goods from X and substitutes the third party’s purchase of X’s goods in satisfaction of its own purchase obligation.

G. LETTERS OF CREDIT

The Basic Commercial Letter of Credit Transaction Generally involves three separate transactions: (i) the underlying

contract between the buyer and seller for the purchase of goods; (ii) the agreement between the issuer and its customer, and (iii) the bank’s obligation to pay the seller under the letter of credit itself.

Fundamental Principles The principle of independence establishes that each contract is

completely independent of the next. Therefore, a letter of credit is independent of the underlying sales contract and both the banks and the parties must construe and perform the letter of credit in

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accordance with their own terms, without reference to any other agreement or transaction.

The principle of compliance dictates that documents presented to the bank must comply with the letter of credit requirements.

Governing Laws UCC Article 5 . The US is the only country with an extensive specific

regulation for letters of credit. International practice, as reflected in the UCP, heavily influenced the UCC revisions in 1995.

Article 5 governs only a limited part of the letter of credit transaction.

Can be a source of illumination particularly on matters involving fraud or forgery.

Uniform Customs and Practice for Documentary Credits . The UCP is a set of rules based on internationally accepted banking practices regulating the issuance and use of letters of credit, drafted by the International Chamber of Commerce.

US courts and arbitration tribunals recognize and enforce the UCP where it is specifically incorporated into the letter of credit. When incorporated, the UCP is binding upon all parties unless expressly modified or excluded by the letter of credit.

Virtually every letter of credit incorporates the UCP in today’s transactions.

The Nature of Strict Documentary Compliance If a bank determines that documentary discrepancies exist, the bank

may elect to dishonor the letter of credit or ask the applicant for a waiver of the documentary requirements.

Since the bank is funding against the documents presented, it must protect itself from disbursing funds for receipt of documents to the wrong goods – mirror image.

“It is quite impossible to suggest that a banker [would have] the knowledge of the customs and customary terms of everyone of the thousands of trades for whose dealings he may issues letters of credit.” JH Rayner & Co., Ltd. v. Hambros Bank Ltd.

Compliance Under UCP 500 Article 13(a) of the old UCP 500 provides that banks must examine

all presentation documents to determine whether they conform, ex facie, to the requirements of the credit.

The criterion for determining conformity is the “international standard banking practice as reflected in the UCP provisions.”

The UCP implicitly prescribes the standard of a reasonably knowledgeable and diligent bank documents checker. Consistent with this standard is the exercise of commercial common sense, on a case-by-case basis, such that minor deviation of a clerical, typographical nature, will, generally, not justify dishonor.

UCP 500 applied a strict compliance standard!

Compliance Under UCC § 5-108(a) Except as otherwise provided in Section 5- 109, an issuer shall

honor a presentation that, as determined by the standard practice referred to in subsection (e), appears on its face strictly to comply with the terms and conditions of the letter of credit. Except as otherwise provided in § 5- 113 and unless otherwise agreed with the

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applicant, an issuer shall dishonor a presentation that does not appear so to comply.

Where Character of Discrepancy May Not Matter One instance is where the information required in the letter of

credit is omitted in the presentation documents. Where it can be shown that a supposed discrepancy results from a patent error or obvious typographical mistake, it is unrealistic to treat the tender as invalid by reason only of a technical slip or mistake.

Beneficiary has no control over the third parties who generally draft the documents.

The second instance is where tendered documents are discordant with the terms of the letter of credit on the ground that the requisite designation of a party, name of a person or place, or number has been mis-transcribed in the presentation documents and the mis-transcription is such as would invite a reasonable bank document checker to make inquiry beyond the tendered documentation, mislead the bank, necessitate the solicitation of legal advice, or raise the likelihood of nonperformance or fraud by the beneficiary.

The Basis of Strict Documentary Compliance From the standpoint of the account party (buyer/importer), the doctrine

functions as a safeguard against the possibility of dishonest of the beneficiary (seller/exporter) and some third party whose services the seller might enlist in the course of performing his obligations under the underlying contract (i.e., carrier).

From the standpoint of the beneficiary, upon notification of the opening of a letter of credit, the beneficiary has ample opportunity to review the terms and conditions under which he would be entitled to make a draw.

The emerging solution seems to be that once the credit has been advised and a presentation made, absent ambiguity in the credit, the beneficiary must live with the terms of the credit as notified.

From the standpoint of the issuing bank, the underlying principle of the letter of credit transaction is the independence of the three contracts. The issuing bank does not verify that all the terms of the underlying contract have been fulfilled and must pay on a draft properly presented by a beneficiary, without reference to the rights or obligations of the parties to the contract. The issuing bank need only make a facial examination of the presenting documents to determine whether the beneficiary has complied with the terms of the letter of credit, however, the bank bears the risk of any misinterpretation of the beneficiary's demand for payment.

Voest-Alpine Standard and UCP 600

Voest-Alpine Trading USA Corp. v. Bank of ChinaFacts: Plaintiff Voest-Alpine contracted with JFTC for the supply of certain materials. Plaintiff financed the transaction through defendant bank. A letter of credit was issued and various misspellings and technical errors were present on the instrument. After the price of materials changed substantially, plaintiff failed to reduce the price and a dispute arose which involved the entities and the financial instruments behind the transaction. Plaintiff's bank requested that the defendant bank honor the letter of credit and pay plaintiff accordingly. Holding: The court indicated that Uniform Customs and Practices for Documentary Credits was on point and that defendant was supposed to file a timely notice of rejection with the reasons set forth therein. The court noted that this was not done.

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The court also held that the spirit of the agreement was of importance rather than any technical misspellings or slight errors in the letter of credit. Therefore, the court held in favor of the plaintiff.Reasoning: Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit. Compliance of the stipulated documents on their face with the terms and conditions of the Credit shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit.

The Voest-Alpine Standard Rejecting the notion that all of the documents should be exactly

consistent in their wording, the court relied on an ICC opinion stating, consistency as used in Article 13(a) to mean that “the whole of the documents must obviously relate to the same transaction, that is to say, that each should bear a relation (link) with the others on its face.”

The UCP 600 Standard Rejects the strict compliance test and supports compliance under

the rational link test.

Problem 5.1 – Gold Watch Pens to France Galleries is applicant (buyer) and Shady is beneficiary (seller). Sept 4 BNP opened a letter of credit for buyer. BNP then requested

Metrobank in New York to advise seller and confirm the credit. Sept 25 BNP receives telex from Metro that seller presented

documents, Metro confirmed the documents, and BNP’s account was charged.

Oct 3 BNP received the documents and sent a telex to Metro noting the discrepancy in “LCD” v. “ICD” on the documents.

Oct 6 BNP sent another telex to Metro citing additional discrepancies; that no original invoices were presented and that all invoices presented were marked “pro forma.”

Oct 7 Metro sent a telex to BNP stating that BNP’s original telex referred to the goods as “ICD” not “LCD,” that the invoice was an acceptance form because the letter of credit did not prohibit the use of pro forma invoices, and further that BNP is precluded from raising additional discrepancies.

“LCD” v. “ICD” turned out to be a technical error in the telex system.

Governing Law The letter of credit specifically incorporated the UCP. Comment 3 to § 5-116 also directs us to ignore UCC Article 5.

Compliance Under the UCC and UCP §§ 5-108(a) and (e) provide for a strict compliance standard. Article 14 of UCP 600 provides for a rational link standard.

Application of UCC § 5-108 BNP

Pursuant to § 5-116(b), the liability of the issuer for “action or omission is governed by the law of the jurisdiction in which the

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person is located. Since BNP is located in France, the law of France will apply.

Metro LCD v. ICD. Examining the presentation “on its face” for strict

compliance under § 5-108(a), ICD is different from LCD because ICD could be a different product.

No originals invoices. BNP requires that the invoice be original. BNP asserts that the invoice was not original in which case it would be noncompliant under § 5-108(a).

Marked pro forma. BNP required “signed commercial invoices” but received invoices that were marked pro forma.

Application of Article 14 of UCP 600 LCD v. ICD. Banks must examine documents “on their face” to

constitute compliance under Article 14(a). The risk to the issuer is that ICD could be a different product from LCD and the documents could mislead the bank into paying to its detriment.

No original invoices. Article 17(b) states that a “bank shall treat as an original any document bearing an apparently original signature, mark, stamp or label…unless the document itself indicates that it is not an original.”

Marked pro forma. Under Article 14(f), the requirement of a commercial invoice in a credit will be held to a higher standard of compliance. Because BNP required “signed commercial invoices,” there is a strong case for noncompliance.

Risk of Transmission Error Article 35 – Disclaimer on Transmission and Translation. Article 37 – Disclaimer for Acts of an Instructed Party. Buyer is liable for the transmission error. There is no reason for the

confirming bank to pay the issuing bank. However, there may still be an issue between BNP and the buyer.

Adequacy/Timeliness of Notice Under Articles 16(c) and (f), the first notice of discrepancy (LCD v.

ICD) is effect but the second notice (no originals and pro forma) is precluded.

Article 16(f) states that a notice of discrepancy must be provided “no later than the close of the fifth banking day following the day of presentation.”

Under UCC § 5-108 the preclusion issue is less clear. The phrase “timely notice” raises questions of whether a second timely notice received within the seven days stipulated in subsection (b) would be acceptable or precluded.

H. FOREIGN CORRUPT PRACTICES ACT

Purpose of the FCPA To prohibit payments to foreign officials prohibited by the act and to

require issuers registered maintain accurate financial records that would tend to disclose the existence of such payments.

The FCPA does not prohibit bribes qua bribes.

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Two important questions are (i) for what purpose was the payment made and (ii) what is the magnitude of the affect on the foreign nation caused by the payments to one of the nation’s officials?

Violations of the FCPA can be used as the basis for bringing a RICO violation.

Amendments to the FCPA The 1988 amendments removed the “reason to know” language from

the provision governing payments to third persons, which might be passed on to government officials, replacing it with a definition of “knowing.”

The 1998 amendments coincided with the U.S. adoption of the OECD convention and added as prohibited payments made to secure “any improper advantage,” and expanded the scope of the Act beyond issuers or domestic concerns to cover prohibited acts by “any person.”

Foreign persons are now included if their acts occur in the United States.

Jurisdiction is extended to assure coverage of acts that take place wholly outside the United States, and the officials of international organizations are brought within the definition of foreign officials.

The “Eckhardt Amendment” contained in the original FCPA effectively prevented the prosecution of employees or agents for violating the FCPA unless the domestic concerns or issuers were found to have violated the Act. However, the amendment was deleted under the Trade Act.

15 U.S.C.A. § 78dd-1(a) – Prohibited Foreign Trade Practices by Issuers It shall be unlawful for any issuer which has a class of securities

registered pursuant to section 78l of this title or which is required to file reports under section 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to:

(1) any foreign official for purposes of: (A)(i) influencing any act or decision of such foreign official in his

official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or

(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,

in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;

(3) any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office, for purposes of

(A)(i) influencing any act or decision of such foreign official, political party, party official, or candidate in his or its official

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capacity, (ii) inducing such foreign official, political party, party official, or candidate to do or omit to do any act in violation of the lawful duty of such foreign official, political party, party official, or candidate, or (iii) securing any improper advantage; or

(B) inducing such foreign official, political party, party official, or candidate to use his or its influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,

in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person.

15 U.S.C.A. § 78dd-1(b) – Exceptions for Routine Governmental Action Subsections (a) and (g) of this section shall not apply to any facilitating

or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.

15 U.S.C.A. § 78dd-1(c) – Affirmative Defenses It shall be an affirmative defense to actions under subsection (a) or (g)

of this section that: (1) the payment, gift, offer, or promise of anything of value that was

made, was lawful under the written laws and regulations of the foreign official's, political party's, party official's, or candidate's country; or

(2) the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to:

(A) the promotion, demonstration, or explanation of products or services; or

(B) the execution or performance of a contract with a foreign government or agency thereof.

15 U.S.C.A. § 78dd-1(f) – Definitions (1)(A) The term “foreign official” means any officer or employee of a

foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.

(3)(A) The term “routine governmental action” means only an action which is ordinarily and commonly performed by a foreign official in:

(i) obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country;

(ii) processing governmental papers, such as visas and work orders; (iii) providing police protection, mail pick-up and delivery, or

scheduling inspections associated with contract performance or inspections related to transit of goods across country;

(iv) providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or

(v) actions of a similar nature.

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INTELLECTUAL PROPERTY LICENSING

A. CROSS-BORDER IP TRANSFERS

Overview Developing nations want production processes which maximize use of

abundant, inexpensive labor but which result in products that are competitive in the international market; capital intensive production processes (e.g., robotic assembly lines for automobiles) of less interest.

The predominant vehicle for controlling technology transfers across national borders is the license or franchise agreement.

Concerns for the Licensor/Franchisor Trade secret law is jurisdiction by jurisdiction; need to know what

affirmative acts to take to protect trade secrets. How to protect patent in foreign jurisdictions (parties could try to

reverse engineer). Quality control. How to incorporate improvements and who controls said

improvements. Export controls (i.e., technology you cannot export to certain

countries). Royalties – how computed, how often, etc… Monitoring the licensee’s business operations. Monitoring trade dress (i.e., ensuring that trademarks are properly

applied). Marketing and advertising as well. Liability for products licensed but manufactured by licensee. Territory and exclusivity. Control of its intellectual property post-termination.

Concerns for the Licensee/Franchisee IP infringement. Keeping royalties low. Liability. Term and termination rights under licensing agreement. Some say over monitoring operations.

IP Protection Patent Protection.

For the most part, patents represent territorial grants of exclusive rights and are granted to inventors according to national law.

In the US, a patent issued will grant the right for 20 years from the date of application (17 years from the date of issuance prior to TRIPS) to exclude anyone from making, using or selling the patented invention without the permission of the patentee.

The US has a first to invent priority – not first to file. The US also has an examination system, inquiring into

patentability of the invention.

International Recognition of Patents

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Article 2 of the Paris Convention, granting the right of national treatment prohibits discrimination against foreign holders of local patents and trademarks.

It obviates the need to file simultaneously in every country where intellectual property protection is sought – however – it does not eliminate the need to file in the different jurisdictions if protection is sought.

The Patent Cooperation Treaty was designed to achieve greater uniformity and less cost in the international patent filing process.

Filings are made under the PCT is select countries. The application, together with an international search report,

is communicated to each national patent office where protection is sought.

Knowhow. Knowhow is commercially valuable knowledge. Unlike patents, copyrights and trademarks, you cannot by

registration obtain exclusive rights to knowhow – once released to the community, it cannot be retrieved.

Protecting knowhow is mostly a function of contract, tort and trade secrets law.

The Economic Espionage Act of 1996 creates criminal penalties for misappropriation of trade secrets for the benefit of foreign governments or anyone.

A trade secret is defined as “financial, business, scientific, technical, economic or engineering information” that the owner has taken reasonable measures to keep secret and whose “independent economic value derives from being closely held.”

Trademarks. Obtaining international trademark protection requires separate

registration under the law of each nation where it is sought. The scope of trademark protection may differ substantially from

country to country. Although national trademark schemes differ, it can be said that

generally a valid trademark will be protected against infringing use. Unlike patents and copyrights, trademarks may be renewed

continuously. The principal US trademark law, the Lanham Act of 1946, has been

construed to apply extraterritorially to foreign licensees engaging in deceptive practices.

Foreigners who seek a registration may be required to prove a prior and valid “home registration” and a new registration in another country may not have an existence independent of the home country registration’s continuing validity.

International Recognition of Trademarks Article 2 of The Paris Convention, granting the right of national

treatment prohibits discrimination against foreign holders of local trademarks.

Convention also mitigates the frequent national requirement that foreigners seeking trademark registration prove a pre-existing, valid and continuing home registration.

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Article 6bis gives owners of “well known” trademarks the right to block or cancel the unauthorized registration of their marks.

The Nice Agreement adopts, for the purposes of the registration of marks, a single classification system for goods and services.

Copyrights. Nearly one hundred nations recognize some form of copyright

protection for authors’ works – varying from country to country. In the US, it is not necessary to publish a work to obtain a copyright;

it is sufficient that the work is original and fixed in a tangible medium of expression.

US copyright protection now extends for 70 years after the death of the author and also controls all derivative works.

Registration with the copyright office is not required to obtain copyright rights but it is essential to federal copyright infringement remedies.

In the US, the Copyright Felony Act of 1992 criminalized all copyright infringements.

The Digital Millennium Copyright Act of 1998 brought the US into compliance with WIPO treaties and created two new copyright offenses: (i) for circumventing technological measures used by copyright owners to protect their works (“hacking”); and (ii) for tampering with copyright management information (“decryption”).

International Recognition of Trademarks Absent an appropriate convention, copyright registrations must

be acquired in each country recognized such rights. The Universal Copyright Convention of 1952 provides for

national treatment, translation right and other benefits. Excuses foreigners from registration requirements provided

notice of a claim of copyright is adequately given. The GATT/WTO and Intellectual Property (TRIPs)

The Uruguay Round accords in 1994 included an agreement on trade-related intellectual property rights creating a general requirement of national and most-favored-nation treatment among the parties.

The TRIPs code covers the gamut of intellectual property. On patents, the Paris Convention prevails – product and process

patents are to be available for pharmaceuticals and agricultural chemicals, limits are placed on compulsory licensing, and a general 20-year patent term is created.

Infringement and anti-counterfeiting remedies are included in TRIPs, for both domestic and international trade protection.

B. LICENSING AGREEMENTS – EUROPEAN UNION

Principles of European Union Law Transfers of Technology

Concerned about possible anti-competitive practices; the EU has a deregulatory agenda but a licensing transaction with exclusivity and/or territory provisions seems like a segregation of the EU – exactly what they’re trying to deconstruct.

Prohibits certain types of agreements that are incompatible with the common market when they affect trade between the member states and have the object or effect of restricting competition.

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The Maize Seed Judgment. INRA, a French breeder of seed varieties, assigned to Eisele “plant

breeder’s rights” for maize seed in Germany. Provisions in the agreement gave Eisele the exclusive rights to

“organize” sales of six varieties, enabling him to exercise control over distribution outlets; required Eisele to place no restrictions on the supply of seed; obligated Eisele to import from France for sale in Germany at least two-thirds of Germany’s requirements, restricting Eisele’s own production and sale to only 1/3 of the German market; granted Eisele the power to protect INRA’s intellectual property; and contained a promise by INRA that no exports to Germany would take place otherwise than through Eisele, meaning that INRA would ensure that its French marketing organization would prevent the relevant varieties from being exported to Germany through parallel importers.

By 1972 it became apparent that dealers in France were selling the varieties directly to German traders who were marketing the products in breach of the breeder’s rights claimed by Eisele. Eisele brought suit and the French traders agreed to seek permission. After a second suit, the French trader filed a complaint with the Commission.

The Commission found that both the agreement and the settlement violated Article 81(1) because they granted an exclusive license and provided absolute territorial protection.

The ECJ reversed the Commission with respect to exclusivity but upheld the Commission’s finding with respect to absolute territorial protection.

The ECJ drew a distinction between “open” licenses, which do not necessarily fall under Article 81(1), and “closed” licenses that do so.

“Open” v. “Closed” Licenses Open licenses are those that do not involve third parties.

In Maize Seed, the obligation upon INRA or those deriving rights through INRA to refrain from producing or selling the relevant seeds in Germany was treated as an open license term.

The ECJ held such clauses necessary to the dissemination of new technology inasmuch as potential licensees might otherwise be deterred from accepting the risk of cultivating and marketing new products.

Closed licenses are those that do involved third parties. The obligation upon INRA or those deriving rights through INRA

to prevent third parties from exporting seeds into Germany without authorization, Eisele’s concurrent use of his exclusive contractual rights, and his breeder’s rights, to prevent all imports into Germany or exports to other member states were invalid under Article 81(1).

EU Regulations Article 81 of the Treaty of Rome

(1) The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object

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or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;

(b) limit or control production, markets, technical development, or investment;

(c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with

other trading parties, thereby placing them at a competitive disadvantage;

(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

(2) Any agreements or decisions prohibited pursuant to this article shall be automatically void.

(3) The provisions of paragraph 1 may, however, be declared inapplicable in the case of: any agreement or category of agreements between undertakings, any decision or category of decisions by associations of undertakings, any concerted practice or category of concerted practices,

which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:

(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;

(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

Transfer of Technology Regulation 772/2004 Provides guidance on how to fall under the exemption provisions of

Article 81(3). Distinguishes agreements between those of “competing” and

“noncompeting” parties, the latter being treated less strictly than the former.

Parties are deemed competing if they compete (w/o infringing each other’s IP rights) in either the relevant technology or product market, determined in each instance by what buyers regard as substitutes.

If the competing parties have a combined market share of 20% or less, their licensing agreements are covered by the group exemption under Regulation 772/2004.

Noncompeting parties benefit from the exemption so long as their individual market shares do not exceed 30%.

If over market share caps, must have individual review by the Commission.

Agreements initially covered Regulation 772/2004 but that subsequently exceed the “safe harbor” thresholds lose their exemption subject to a two-year grace period.

Out the exemptions, a “rule of reason” approach applies. Inclusion of certain “hardcore restraints” can cause licensing

agreements to lose their group exemption.

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For competing parties, such restraints include price fixing, output limitations on both parties, limits on the licensee’s ability to exploit its own technology, and allocation of markets or competitors (subject to exceptions).

Specifically, restraints on active or passive selling by the licensee in a territory reserved for the licensor are allowed, as are active (but not passive) selling restraints by licensees in territories of other licensees.

For noncompeting parties, licensing agreements may not contain the hardcore restraint of price fixing.

Active selling restrictions on licensees can be utilized, along with passive selling restraints in territories reserved to the licensor or for two years, another licensee.

Inclusion of other license terms can also cause a loss of exemption. Such clauses include mandatory grant-banks or assignments of

severable improvements by licensees, excepting nonexclusive license-backs; no-challenges by the licensee of the licensor’s intellectual property rights, subject to the licensor’s right to terminate upon challenge; and for noncompeting parties, restraints on the licensee’s ability to exploit its own technology or either party’s ability to carry out research and development (unless indispensable to prevent disclosure of the licensed know-how).

Regulation 772/2004 Summary Between Types of Firms Competing Firms

Exclusivity is ok. Parties can close their territories off to one another (absolute

territorial protection). Ok, if and only if, non-reciprocal. If competing firms and reciprocal license, then they cannot

close territories. Licensor can restrict the active sales of one licensee into another

licensee’s territory. Between licensees, you must always allow passive sales.

Allows for a minimum amount of competition. Competing Firms – Reciprocal Licenses

Exclusivity ok. All other provisions are conditioned upon it being a non-

reciprocal agreement. No absolute territorial protection (i.e., must allow active/passive

sales). Competing Firms – Non-reciprocal Licenses

Exclusivity is ok. Absolute territorial protection between licensor and licensee is

ok. Active sales restriction between licensee one and licensee two is

ok as long as licensee two was not a competing firm previously. Non-competing Firms

Since they’re not competing, a cross-license (reciprocal) is not a big deal.

No language in § 2 regarding reciprocal/non-reciprocal. Exclusivity is ok (nowhere prohibited). Licensor and licensee can block active and passive sales in each

other’s territory.

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Licensee one and licensee two can block active sales. Can block passive sales between licensees during first two years

that the licensee is selling products in that territory.

Basic Assumptions Licenses between firms with greater market shares pose a greater

risk to competition than licenses between firms with smaller market shares; reason why there are market share caps.

Licenses between competitors pose a great risk to competition than licenses between non-competitors.

Cross licensing/reciprocal license poses a greater risk. If you have provisions listed in Article 5 of Regulation 772/2004,

those provisions will not be covered by the safe harbor but the entire agreement may otherwise be sufficient.

Problem 9.4 – Drill Bit in Germany Drill Bit Manufacturing Co. wants to enter into a license agreement

with NordMetall. Paragraph 1 – Grant of License

DB grants NM exclusive rights in Germany → Ok under EU regulations.

DB grants NM the tentative rights to sell outside of Germany except that it may not sell in France or the UK.

DB grants that no other distributors will be allowed to actively sell in Germany.

As between DB and NM, the license says that NM has Germany and the rest of Europe is the territory of DB → this is ok.

If distributorships in France and UK are licensees, then you cannot block passive sales unless they are in the first two years of their sales.

If the distributors are not licensees, then they can block active sales – if the distributors are licensees, they can block active sales as between two licensees.

Agreement language regarding “prices to be established by DB” would have to be changed to bring it in line with the regulation (only allowed to set a max price or recommend a price).

Paragraph 2 – No Competition Arrangements Not going to create any other licensees but DB is reserving the

right for itself to sell into Germany. Paragraph 7 – Grant Back

Looks like a textbook violation of Article 5 – cannot get exclusive license.

No incentive to NM to do any research on the licensed product.

Could push for a non-exclusive license for improvements. If the improvement doesn’t work without the patent, then its

non-severable and of little value to NM – if it is severable then NM would probably want to retain control.

C. LICENSING AGREEMENTS – NAFTA

Overview Chapter 17 of the NAFTA agreement contains a comprehensive set of

rules for North American intellectual property rights.

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NAFTA doesn’t regulate licensing agreements but does set some minimum standards for the protection of intellectual property and applicable remedies.

Licensor can at least be assured under NAFTA of some minimal protection for IP

Treaty does not provide remedies for private parties. Both NAFTA and TRIPS stipulate that whichever agreement affords the

broadest protection of intellectual property will prevail.

General Obligations There is a general duty to protect intellectual property adequately

and effectively, as long as barriers to legitimate trade are not created.

At a minimum this necessitates adherence to Chapter 17 of the NAFTA agreement.

Also requires adherence to substantive provisions of the: Geneva Convention of Phonograms; Berne Convention for the Protection of Literary and Artistic Works; Paris Convention for the Protection of Industrial Property; and International Convention for the Protection of New Varieties of Plants.

Process of enforcement is also addressed, requiring fair, equitable and not unduly complicated, costly or time-consuming enforcement procedures.

Patents Article 1709 of NAFTA assures the availability of patents in all fields

of technology. All patent rights must be granted without discrimination as to

field of technology, country of origin, and importation or local production of the relevant products.

Since the US awards patents on a first-to-invent basis, activities in Canada and Mexico now count for purposes of establishing the date of an invention.

NAFTA specifically reserves the right to deny patents for diagnostic, therapeutic and surgical methods, transgenic plants and animals, and for essentially biologic processes that produce plants or animals.

If commercial exploitation might endanger public morality or state security, no patents need be granted.

No mention is made of the right to block infringing or unauthorized imports.

Though not authorized under US law, governments may allow limited nonexclusive usage without the owner’s authorization (compulsory licensing) for emergencies or public policy.

Trade Secrets At a minimum, each nation must ensure legal means to prevent

trade secrets from being disclosed, acquired or used without consent “in a manner contrary to honest commercial practices.”

NAFTA does not mention, however, the practice of reverse engineering.

No government may discourage or impede the voluntary licensing of trade secrets. Imposing excessive or discriminatory conditions on know-how licenses is prohibited.

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NAFTA-Plus US free trade agreements since NAFTA have evolved substantially

under a policy known as competitive liberalization. Coverage of labor and environmental law enforcement is folded into

the trade agreement and all remedies are intergovernmental. Post-NAFTA free trade agreements insert the word “customary” before

international law in defining the minimum standard of treatment to which foreign investors are entitled.

“Fair and equitable treatment” and “full protection and security” are also now defined.

NAFTA-Plus has also moved into the Internet age – protection of domain names and adherence to the WIPO Internet treaties are stipulated.

Pharmaceutical patent owners obtain extensions of their patents to compensate for delays in the approval process and greater control over their test data, making it harder for generic competition to emerge.

They also gain “linkage” which means that local drug regulators must make sure generics are not patent-infringing before their release.

Anti-dumping and countervailing duty laws remain applicable but appeals from administrative determinations are taken in national courts, not bi-national panels.

The US has generally used its leverage with small trade partners in the Americas to obtain more preferential treatment and expanded protection for its goods, services, technology and investors. It has given up relatively little in return, for example a modest increase in agricultural market openings.

D. LICENSING INTO LATIN AMERICA

DoJ Antitrust Guidelines General Principles.

Antitrust concerns may arise when a licensing arrangement harms competition among entities that would have been actual or likely potential competitors in a relevant market in the absence of the license (entities in a “horizontal relationship”).

A restraint in a licensing arrangement may harm such competition if it facilitates market division or price-fixing. License restrictions with respect to one market may harm such competition in another market by anti-competitively foreclosing access to, or significantly raising the price of, an important input, or by facilitating coordination to increase price or reduce output.

Markets Affected by Licensing Arrangements Licensing arrangements raise concerns under the antitrust laws if

they are likely to affect adversely the prices, quantities, qualities, or varieties of goods and services either currently or potentially available.

The Agencies will analyze the licensing agreement, the relevant market indicators, and all surrounding facts to determine if the provisions create an anticompetitive result in any of the following markets:

Goods Markets. Does it decrease the number of firms selling the product?

Technology Markets. Does it reduce competition by decreasing the number of firms with the technology capable of manufacturing the product?

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Innovation Markets. Does it decrease the research and development conducted to better manufacture the product?

Horizontal and Vertical Relationships The Agencies ordinarily will treat a relationship between a licensor

and its licensees, or between licensees, as horizontal when they would have been actual or likely potential competitors in a relevant market in the absence of the license.

The existence of a horizontal relationship between a licensor and its licensees does not, in itself, indicate that the arrangement is anticompetitive.

A licensing arrangement has a vertical component when it affects activities that are in a complementary relationship, as is typically the case in a licensing arrangement.

For example, the licensor's primary line of business may be in research and development, and the licensees, as manufacturers, may be buying the rights to use technology developed by the licensor.

Framework for Evaluating Licensing Restraints In the vast majority of cases, restraints in intellectual property

licensing arrangements are evaluated under the rule of reason. The Agencies' general approach in analyzing a licensing

restraint under the rule of reason is to inquire whether the restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve pro-competitive benefits that outweigh those anticompetitive effects.

Application of the rule of reason generally requires a comprehensive inquiry into market conditions.

If the Agencies conclude that a restraint has no likely anticompetitive effects, they will treat it as reasonable, without an elaborate analysis of market power or the justifications for the restraint.

If a restraint facially appears to be of a kind that would always or almost always tend to reduce output or increase prices, and the restraint is not reasonably related to efficiencies, the Agencies will likely challenge the restraint without an elaborate analysis of particular industry circumstances.

In some cases, however, the courts conclude that a restraint's “nature and necessary effect are so plainly anticompetitive” that it should be treated as unlawful per se, without an elaborate inquiry into the restraint's likely competitive effect.

Among the restraints that have been held per se unlawful are (i) naked price-fixing, (ii) output restraints, (iii) market division among horizontal competitors, (iv) certain group boycotts and (v) resale price maintenance.

To determine whether a particular restraint in a licensing arrangement is given per se or rule of reason treatment, the Agencies will assess whether the restraint in question can be expected to contribute to an efficiency-enhancing integration of economic activity.

A restraint in a licensing arrangement may further such integration by, for example, aligning the incentives of the licensor and the licensees to promote the development and

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marketing of the licensed technology, or by substantially reducing transactions costs.

DoJ - Evaluation of Licensing Arrangements Under the Rule of Reason Market Structure, Coordination, and Foreclosure

When a licensing arrangement affects parties in a horizontal relationship, a restraint in that arrangement may increase the risk of coordinated pricing, output restrictions, or the acquisition or maintenance of market power. Harm to competition also may occur if the arrangement poses a significant risk of retarding or restricting the development of new or improved goods or processes.

Potential for competitive harm depends in part on the degree of concentration in, the difficulty of entry into, and the responsiveness of supply and demand to changes in price in the relevant markets.

When the licensor and licensees are in a vertical relationship, the Agencies will analyze whether the licensing arrangement may harm competition among entities in a horizontal relationship at either the level of the licensor or the licensees, or possibly in another relevant market.

Harm to competition from a restraint may occur if it anti-competitively forecloses access to, or increases competitors' costs of obtaining, important inputs, or facilitates coordination to raise price or restrict output.

The risk of anti-competitively foreclosing access or increasing competitors' costs is related to the proportion of the markets affected by the licensing restraint; other characteristics of the relevant markets, such as concentration, difficulty of entry, and the responsiveness of supply and demand to changes in price in the relevant markets; and the duration of the restraint.

Harm to competition from a restraint in a vertical licensing arrangement also may occur if a licensing restraint facilitates coordination among entities in a horizontal relationship to raise prices or reduce output in a relevant market.

Licensing Arrangements Involving Exclusivity A licensing arrangement may involve exclusivity in two distinct

respects. The licensor may grant one or more exclusive licenses, which

restrict the right of the licensor to license others and possibly also to use the technology itself.

Generally, an exclusive license may raise antitrust concerns only if the licensees themselves, or the licensor and its licensees, are in a horizontal relationship.

A second form of exclusivity, exclusive dealing, arises when a license prevents or restrains the licensee from licensing, selling, distributing, or using competing technologies.

The Agencies will focus on the actual practice and its effects, not on the formal terms of the arrangement.

Efficiencies and Justifications If the Agencies conclude that the restraint has, or is likely to have,

an anticompetitive effect, they will consider whether the restraint is reasonably necessary to achieve pro-competitive efficiencies. If the restraint is reasonably necessary, the Agencies will balance the pro-

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competitive efficiencies and the anticompetitive effects to determine the probable net effect on competition in each relevant market.

The existence of practical and significantly less restrictive alternatives is relevant to a determination of whether a restraint is reasonably necessary.

The duration of the restraint can be an important factor in determining whether it is reasonably necessary to achieve the putative pro-competitive efficiency.

A restraint that may be justified by the needs of a new entrant, for example, may not have a pro-competitive efficiency justification in different market circumstances.

Antitrust “Safety Zone” Absent extraordinary circumstances, the Agencies will not challenge

a restraint in an intellectual property licensing arrangement if (i) the restraint is not facially anticompetitive and (ii) the licensor and its licensees collectively account for no more than 20% of each relevant market significantly affected by the restraint.

Whether a restraint falls within the safety zone will be determined by reference only to goods markets unless the analysis of goods markets alone would inadequately address the effects of the licensing arrangement on competition among technologies or in research and development.

Absent extraordinary circumstances, the Agencies will not challenge a restraint in an intellectual property licensing arrangement that may affect competition in a technology market if (i) the restraint is not facially anticompetitive and (ii) there are four or more independently controlled technologies in addition to the technologies controlled by the parties to the licensing arrangement that may be substitutable for the licensed technology at a comparable cost to the user.

Absent extraordinary circumstances, the Agencies will not challenge a restraint in an intellectual property licensing arrangement that may affect competition in an innovation market if (i) the restraint is not facially anticompetitive and (ii) four or more independently controlled entities in addition to the parties to the licensing arrangement possess the required specialized assets or characteristics and the incentive to engage in research and development that is a close substitute of the research and development activities of the parties to the licensing agreement

DoJ – Application of General Principles Horizontal Relationships.

The existence of a restraint in a licensing arrangement that affects parties in a horizontal relationship (a “horizontal restraint”) does not necessarily cause the arrangement to be anticompetitive as the arrangement may result in integrative efficiencies, arising from, for example, from the realization of economies of scale and the integration of complementary research and development, production, and marketing capabilities.

Exclusive Dealing. In determining whether an exclusive dealing arrangement is likely

to reduce competition in a relevant market, the Agencies will take into account the extent to which the arrangement (i) promotes the exploitation and development of the licensor's technology and (ii)

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anti-competitively forecloses the exploitation and development of, or otherwise constrains competition among, competing technologies.

The likelihood that exclusive dealing may have anticompetitive effects is related, inter alia, to the degree of foreclosure in the relevant market, the duration of the exclusive dealing arrangement, and other characteristics of the input and output markets, such as concentration, difficulty of entry, and the responsiveness of supply and demand to changes in price in the relevant markets.

Grant-Back Provisions. Agencies will evaluate a grant-back provision under the rule of

reason, considering its likely effects in light of the overall structure of the licensing arrangement and conditions in the relevant markets.

If the Agencies determine that a particular grant-back provision is likely to reduce significantly licensees' incentives to invest in improving the licensed technology, the Agencies will consider the extent to which the grant-back provision has offsetting pro-competitive effects, such as (i) promoting dissemination of licensees' improvements to the licensed technology, (ii) increasing the licensors' incentives to disseminate the licensed technology, or (iii) otherwise increasing competition and output in a relevant technology or innovation market.

Decision No. 291 – Andean Common Market. Expressed to encourage the growing alignment of the economic policies

of the Andean Countries in an effort to attain more efficient and competitive economies through liberalization and the opening to trade and international investment, along the lines of each countries’ interest, and the institution of economic rationality grounded in private initiative, fiscal discipline and a rescaled and effective state.

Article 13 . Contracts for the importation of technology must contain clauses

about at least the following matters: (a) identification of the parties and express indication of their nationality and residence; (b) identification of the methods used to transfer the imported technology; (c) contract prices of each of the elements involved in the transfer of technology; and (d) determination of the effective period of the contracts.

Article 14 . In order to register transfer of technology, trademark or patent

contracts, Member Countries may bear in mind that those contracts not contain the following:

a) Clauses by virtue of which the supply of technology or the use of a trademark bears with it the obligation of the recipient country or enterprise to acquire, from a given source, capital equipment, intermediate products, raw materials or other technologies, or to use on a permanent basis personnel indicated by the enterprise supplying the technology;

b) Clauses by virtue of which the enterprise selling the technology or enterprise granting use of a trademark reserves the right to set sale or resale prices for the products that are manufactured using that technology;

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c) Clauses that contain restrictions on the volume and structure of production;

d) Clauses that prohibit use of competing technologies; e) Clauses that establish a total or partial purchase option in

favor of the technology supplier; f) Clauses that compel the technology buyer to transfer to the

supplier all such inventions or improvements as may be obtained though use of that technology;

g) Clauses that require the payment of royalties to the holders of patents or trademarks for patents or trademarks that are not used or have expired; and

h) Other Clauses having an equivalent effect.

Except in special cases that have been duly judged by the competent national agency of the recipient country, clauses prohibiting or limiting in any way the export of the products manufactured using the respective technology shall not be accepted.

Article 15 . In the degree to which intangible technological contributions do not

constitute capital investments, they shall grant the right to receive royalties, in keeping with Member Countries legislation.

The accrued royalties may be capitalized, pursuant to the terms of this Regime, after payment of the taxes due.

When these contributions are supplied to a foreign enterprise by its parent corporation or by another branch of the same parent corporation, the payment of royalties may be authorized in cases judged beforehand by the competent national agency of the recipient country.

Application of Article 14 of Decision No. 291 In order to determine whether Article 14 applies to an agreement,

you would need to know whether: (i) the host nation is a party to the Andean community and (ii) has the host nation has enacted a domestic law that takes such provision into account.

Problem 3.0 – Licensing to Guatador North American firm has developed a process for making small

electronic components and wants to enter into a licensing agreement with a Latin American firm engaged in similar work.

An exclusive license by the licensor. Ok under Decision No. 291 because the licensee may only sell,

manufacture and use the license in Guatador. Limitation on exports.

Specifically prohibited under Article 14. May also be prohibited under DoJ guidelines’ rule of reason

approach. Grant-back provisions.

Prohibited under Decision No. 291 because it does not allow the licensee to use its own improvements.

Royalties. May violate Article 14(g) and Article 15.

Technical assistance.

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In accordance with respective national legislation, the agreement must be registered with the competent national agency of the respective Member Country.

Non-competition provisions. Prohibited under Article 14(d) but would also need to examine

national laws. Termination.

Agreement must include valid termination provisions.

FOREIGN INVESTMENT

A. DIRECT INVESTMENT

The Lifecycle Approach to Foreign Investment The natural progression from sales of goods → licensing → foreign

direct investment. Entry → Operations → Termination/Withdrawal.

Entry Stage Where to invest?

Tax and regulatory issues. Social stability (i.e., low wages can mean high social unrest). Jurisdiction has history of nationalizing assets or industries? Trade law (i.e., how product is treated based on where it was

manufactured). Rules of Origin – products need to be transformed, not just

assembled. Quality of life issues for officers/employee of the corporation. Operational Code – the law as its written v. how it actually

operates. What type of entity to establish?

Generally between large publically traded (AG, SA and PLC) v. small privately held company (GmbH, SARL, PLC).

Also have hybrids (like S-corps in the US or the SAS in France).

Operating as a subsidiary or as a branch. Keeping costs separated in the subsidiary v. spreading the

losses. If problem on exam has not indicated which type the client

has chosen, it is worth discussing pros/cons of each option. Operating as a joint venture. Operating investment as an acquisition or a “greenfield?”

Different foreign investment laws for acquisitions v. creating new opportunities.

Acquisition may trigger an anti-competition review.

Operational Stage Minimizing liability. Taxation (i.e., worldwide taxation, double taxation). Currency exchanges and availability. Transfer pricing

Manipulating prices between sub/parent to obtain artificial advantages.

Transferring income to obtain better tax treatment

Termination/Withdrawal Stage

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Regulations can be burdensome when trying to withdraw corporate assets.

Foreign treatment if investment enters into bankruptcy. Parent making secured loans to sub rather than just infusing capital.

The Operational Code The operational code consists of the unwritten regulations and

decisions and formal written regulations and decisions but not publically available or discoverable.

N.B. The operational code is always at variance with the written laws, but it must not deviate from the written laws so extensively that it generates so much uncertainty as to reduce foreign investor confidence in the regulatory structure.

Operation and Effect of the Code An indirect variance exists when positive statements of the written

foreign investment law are conditioned by exception provisions but the government routinely grants such exceptions that the positive law becomes a nullity.

It reflects the host nation’s need to be flexible so as to obtain investment while protecting its own economy from overreaching by foreign investors.

The operational code allows the government to treat foreign investors unequally, hidden from public criticism.

Restrictions Upon the Establishment of the Foreign Investment Restrictions on entry tend to assume two forms: (i) restricting the

maximum equity allowed to foreign ownership (including limiting foreign management or control to minority interest); and (ii) limiting investment to contractual joint ventures (foreign party receives % of profits and limited management rights).

Nations have also read the WTO agreements to include a cultural exception.

One area is the need for foreign investors to understand the culture of the foreign nation – including how to conduct business and market products.

The other is where the host nation is fearful that the investment will harm the culture.

Protection of nation’s culture is more often merely protection of the nation’s “cultural industries.”

Once established, the operation of the foreign investment may be subject to various restrictions that divert time and resources away from the main purpose of the investment.

Government oversight may be extensive – requiring “grease” payments.

Possible issues with performance requirements that mandate minimum local content, specify use of local labor or mandate levels of technology used in production.

Withdrawal or termination is also likely subject to restrictions. May affect the ability to repatriate capital, the liability of the parent

for debts of the withdrawing entity and the removal of physical assets from the country.

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B. LOCATION OF INVESTMENT

Überseering BV v. Nordic Construction Company Baumanagement GmbH Überseering, a company incorporated in the Netherlands, purchased a

piece of land in Dusseldorf for business/investment purposes. It contracted with NCC to refurbish a parking garage and hotel on the site. NCC performed the work but Überseering claimed that there were some problems with the quality of the work. In the interim, two German citizens purchased all of the shares of Überseering.

Überseering brought suit against NCC but the German court held that they did not have legal capacity in Germany and, consequently, could not bring legal proceedings there. The German high court eventually affirmed the decision to dismiss Überseering’s action. Überseering appealed to the European Court of Justice for interpretation of Articles 43 and 48.

Findings of the Court Whether Treaty Provisions Apply.

The ECJ held that Articles 43 and 48 apply, providing the right for EU nationals to set up and management undertakings under the same conditions as are laid down by the law of a Member State for its own nationals, and providing that companies or firms formed in accordance with the laws of a Member State and having their registered office within the EU shall be treated in the same way as natural persons who are nationals of Member States, respectively.

Whether there is a Restriction on the Freedom of Establishment. The ECJ held that the requirement of reincorporation of the

company in Germany was tantamount to outright negation of freedom of establishment.

The court gave little credence to Germany’s argument that allowing foreign companies to operate in Germany would involve a risk of circumvention of the Germany provisions protecting joint management.

Where a company formed in accordance with the law of a Member State ('A') in which it has its registered office is deemed, under the law of another Member State ('B'), to have moved its actual centre of administration to Member State B, Articles 43 EC and 48 EC preclude Member State B from denying the company legal capacity and, consequently, the capacity to bring legal proceedings before its national courts for the purpose of enforcing rights under a contract with a company established in Member State B.

Where a company formed in accordance with the law of a Member State ('A') in which it has its registered office exercises its freedom of establishment in another Member State ('B'), Articles 43 EC and 48 EC require Member State B to recognize the legal capacity and, consequently, the capacity to be a party to legal proceedings which the company enjoys under the law of its State of incorporation ('A').

Corporate Forum Shopping While Überseering allows a corporation incorporated in one Member

State to have its legal personality recognized in another Member State, which would allow the corporation to establish its management sea in a location in the EU other then where it is incorporated, and retain the place of incorporation’s rules as the applicable rules to govern the entity’s internal affairs, Kamer von

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Koophandel en Fabrieken voor Amsterdam v. Inspire Art, Ltd. goes one step further and prohibits the EU Member State to which the company management seat has moved from imposing numerous legal requirements on the company, such as the certain companies having to commence with a legal capital equal to the minimum required in the nation where the management seat is located.

The ECJ held that subjection to these rules would constitute a restriction on the freedom of establishment and also held that there was insufficient justification for imposing such restrictions.

Problem 10.1 – DGInt. in Germany/United Kingdom DG International wishes to locate a plant and have the management

seat of its company in Germany but would greatly prefer the entity to be governed by UK company law.

The holdings of the ECJ leave unanswered the extent to which a corporation incorporated outside a Member State may be subject to corporate laws of the Member State without violating the EU freedom of establishment rules.

Under the current German conflicts rules, worker codetermination regulations are not applicable to foreign corporations but there is renewed pressure to amend that view and include corporations incorporated in another Member State.

Incorporate in Delaware? The US is a party to a Friendship, Commerce and Navigation Treaty

with Germany which seems to give any US corporation legal status in Germany. In 2003 and 2004, the German Bundesgerichtshof decided that a Florida and a Delaware corporation, respectively, were entitled to have their judicial status recognized in Germany.

While the decisions do not answer whether there must be some greater link with the state of incorporation than mere incorporation, it seems clear that any required greater link does not extend to have its principal place of business in that state.

C. CODETERMINATION

Codetermination by Workers in German Enterprises The Codetermination Act of 1976.

Mandates the formation of a supervisory board composed of 50% shareholders’ and 50% employees’ representatives for all business organizations regularly employing more than 2,000 employees.

At least one enterprise worker, one salaried employee and one executive employee must be elected, and the number of representatives from each group must reflect the actual proportion of each group to the total work force.

Depending on the size of the supervisory board, two or three seats are reserved for the unions represented in the enterprise.

The codetermination rules are not extended to management but the unions do expect that the elected labor relations director will enjoy the confidence of the employee representatives.

The Works Constitution Act of 1952. Mandates that the supervisory board of every stock corporation1 and

of closed corporations with more than 500 employees be divided: one third must be appointed by the employees, none of them by the union, and two thirds are elected by shareholders.

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1 Amendments in 1994 made codetermination applicable for the AG only if there are more than 500 employees, making the rule the same for the AG and GmbH.

The Works Constitution Act of 1972. Mandates that “works councils” be elected in all establishments or

plants of business organizations with five or more permanent employees qualified to vote.

Works council is elected by all employees – partners, shareholders, directors and executives are not regarded as employees under the Act.

The works council has a mandatory codetermination right in a number of instances:

Social Matters. The works council has a voice in the formal conditions of work, e.g. commencement and termination of the daily working hours, time, place and form of payment; measures for the prevention of unemployment, accidents, occupational diseases, etc…

To the extent a matter is not completely settled by a collective bargaining agreement, the works council has additional influence regarding remuneration.

Personal Matters. The works council must be notified before each layoff or dismissal, whether voluntary or exceptional, and is entitled to request a hearing. If the works council has not been notified in advance, the layoff or dismissal is void and consent cannot be secured afterwards.

Business Modifications. In enterprises with more than twenty employees, the employer must inform the works council of any proposed modifications, which may entail substantial prejudice to the employees, or a large portion thereof.

Among the modifications enumerated are reductions of operations or closure of whole departments of the plant, transfer of departments of the establishment, and important changes in the organization, purpose or plant of the enterprise.

The EU “Works Council Directive” No. 94/45. Its rules are mandatory in all member states. Requires council in companies with more than 1,000 employees

operating with 150 employees in at least two member states. Employees must be given information on and an opportunity to

respond to a broad range of topics including the firm’s economic and financial situation, employment, work methods and mergers and layoffs.

But the information can be withheld when disclosure might “seriously harm” the function of the company or be “prejudicial” to it.

The Societas Europeae (SE) A long held goal of most EU member states has been to harmonize

corporate law. Many British, however, have viewed the way the process has

developed as a means of forcing continental concepts of workers’ participation in management on UK companies.

The 1989 draft regulation included two main proposals: (i) the creation of a European company to be called a societas europeae and (ii) a

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proposed complementing directive which covered workers’ participation.

Though separated, the Commission stated that the directive was an indissociable complement to the regulation and that the two had to be applied concomitantly.

The 1998 proposal involved a dual system. Where employee involvement in management was not present when a SE was formed, such participation would not be required. But where such participation did exist before a SE was established, there would have to be participation consistent with national practices.

In 2001 the EC issued the European Company Statute and related Directive – effective 2004.

An SE is able to operate on a European-wide basis and is governed by Community law applicable in all Member States.

SE companies are still registered in each Member States as with companies established under national law, however, the registration of each SE is also published in the EC’s official journal.

Formation of a European Company By merger of two or more existing public limited companies from at

least two different EU Member States. By the formation of a holding company promoted by public or

private limited companies from at least two different Member States.

By the formation of a subsidiary of companies from at least two different Member States.

By the transformation of a public limited company which has, for at least two years, had a subsidiary in another Member State.

D. MERGER CONTROL

Overview The EC is trying to determine which mergers pose a threat to its

economy. It can sometimes be to a company’s benefit to fall under the competition

law regulations since there will be only one regulatory authority to appease.

Principle is not to ban such mergers but only to trigger a review process.

No focus on the nationality of the corporation – only focused on effects. EC grants an extraterritorial reach of the competition provisions. Provisions also take a broad definition of what constitutes a “merger.”

Cash → Stock – taxable Cash → Assets – taxable Stock → Stock – tax-free Stock → Assets – tax-free

Merger control provisions apply to “all concentrations with a community dimension.”

Under the “Dutch Clause,” even if a merger does not meet the financial thresholds, a member state can still petition the Commission to investigate on public policy grounds.

Under the “German Clause,” if a member state convinces the Commission that a merger disproportionately affects a distinct market, the Commission can defer to the local authorities.

Concentrations which, by reason of the limited market share of the undertakings concerned, are not liable to impede effective competition

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may be presumed to be compatible with the common market. Without prejudice to Articles 81 and 82 of the Treaty, an indication to this effect exists, in particular, where the market share of the undertakings concerned does not exceed 25 % either in the common market or in a substantial part of it.

EC Merger Regulation No. 139/2004 Regulation vests in the Commission the exclusive power to oppose

large-scale community dimension mergers and acquisitions of competitive consequence to the common market.

The Commission evaluates mergers in terms of their compatibility with the common market.

Effective May 1, 2004, the Commission focuses on prohibiting mergers that “significantly impede effective competition” by creating or strengthening dominant positions.

A dominant position is defined by ECJ case law to mean that you can effectively behave independently without respect to any competition.

Commission does have some “teeth” however. If you ignore requested changes, commission can fine you 10% of

worldwide sales for each entity involved. If you don’t pay, they can block imports or seize assets in the

community.

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Article 1(2) – Targeted Toward Large Mergers with a Large Market Presence

A concentration has a Community dimension where: (a) the combined aggregate worldwide turnover of all the firms

concerned is more than € 5,000 million; and (b) the aggregate Community-wide turnover of each of at least

two of the firms concerned is more than € 250 million

Unless each of the firms concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.

Article 1(3) – Targeted Toward Smaller Mergers A concentration that does not meet the thresholds laid down in

paragraph 2 has a Community dimension where:

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(a) the combined aggregate worldwide turnover of all the firms concerned is more than € 2,500 million;

(b) in each of at least three Member States, the combined aggregate turnover of all the firms concerned is more than € 100 million;

(c) in each of at least three Member States included for the purpose of point (b), the aggregate turnover of each of at least two of the firms concerned is more than € 25 million; and

(d) the aggregate Community-wide turnover of each of at least two of the firms concerned is more than € 100 million

Unless each of the firms concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.

→ In (a), CAWT is greater than € 2,500 million.→ In (d), each of at least two has greater turnover than € 100

million.→ In (b), in each of at least three member states, the combined aggregate turnover is more than € 100 million – member state by member state level.→ In (c), for same three member states, the aggregate turnover for at least two the firms sell more than € 25 million.

E. PRIVATIZATION

Fundamental Issues Absence of an adequate legal infrastructure.

Many former nonmarket economies have functioned without necessary legal framework.

New laws must address formation and operation of business enterprises, transfer of property, bankruptcy, banking and securities regulation.

New institutions must also be established to regulate such laws. Government approval process.

Many governments have created a special agency to deal with privatization – usually leads to additional layers of bureaucracy and the potential for corruption.

Agency may develop a list of approved companies for privatization. Likely that such transactions will not be formulaic – it will require

detailed negotiation with the host government to resolve issues on an ad hoc basis.

Worker participation in approval process. Likely concern of the workers is loss of employment.

If works are given approval, privatization may prove impossible. One reason privatization is adopted is to reverse the over-

employment consequence of state ownership with no accountability for costs of production.

Rights of nationals to preferences. Governments may sometimes set aside a percentage of the company

to be privatized for local ownership on behalf of the employees. Employees may be given the first opportunity to purchase shares of

their company. Since nothing is paid for such shares, a foreign investor is likely

to calculate the per share value considering the dilution effect by the percentage of shares acquired by nationals.

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Treatment of foreign investment. Privatization framework may include specific limitations on foreign

participation. May prohibit investment in certain industries; only allow joint

ventures; or give foreign interests last priority in business opportunities.

Methods of valuation. Book value possesses all the problems as occurs in the US plus even

greater distortions due to accounting practices that usually do not adhere to market practices.

Book value may be used to set a low value for purchase by workers with another method used to set a high value for foreign investors.

One prevalent form is through an auction. When the value is set too low, the market quickly raises the price to

a market level and the government is quickly aware of what they have lost by undervaluation.

When the value is set too high, there may be no buyers and the process has to be repeated.

Miscellaneous. Privatization has been most successful with small to medium sized

enterprises. More complex to establish a valuation for large factories, and it is

more difficult to locate willing buyers especially if the operation is inefficient, uses outdated technology, or requires environmental repair.

Incentives Parties Involved Host Nation.

Stops drain on nation’s treasury and public budget. Significant source of one-time revenue to pay off debts. Increases flow of foreign currency (if the company successfully

exports goods). Gains access to new technology and innovation, fostering

competition. Requirement for joining a global organization (i.e., IMF uses as a

condition for loans). Encourage an internal transformation; social relationship to the

market; good economic policy choices. Foreign Investor.

Acquire assets below market value. Can be seen as a politically positive way to enter the market. Not starting from scratch – inheriting added value. Try to acquire assets only to avoid liabilities associated with the

former corporation.

F. INVESTMENT WITHIN NAFTA

TRIMs Regulations A product of the GATT Uruguay Round, the GATT/WTO investment rules

are included in the “Agreement on Trade-Related Investment Measures.”

Drafted to establish the principle of national treatment for investments. Trade-related investment measures that are considered inconsistent

with GATT/WTO obligations include such performance requirements as minimum domestic content, imports limited or linked to exports,

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restrictions on access to foreign exchange to limit imports for use in the investment, etc…

However, developing countries are allowed to “deviate temporarily” from the national treatment concept, thus diminishing the effectiveness of the provisions.

Regulations set out in Article 2 w/ Annex. No member shall apply any TRIM that is inconsistent with Art. 3 or

Art. 11 of GAAT Art. 3 – National treatment, Art. 11 – Quantitative restrictions.

Recourse available. Lobby your own government to take up the issue; only after

negotiations. Section 301 – petition U.S. trade representative on behalf of an

industry.

NAFTA Regulations Preamble to agreement states the signing parties’ resolution to “ensure

a predictable commercial framework for business planning and investment.”

Investment Provisions. The principal assurances of access and protection are found in Ch.

11-A. 11.02 – National Treatment. 11.03 – MFN. 11.04 – Standard of Treatment.

Must give MFN status or national treatment. Requires parity.

11.05 – Minimum Standard Must give a basic level of protection consistent with

international law. 11.06 – Performance Requirements.

Things not allowed that restrict trade. 11.08 – Reservations.

Allows reservations or exceptions. 11.10 – Expropriation/Compensation.

Enforcement of regulations is found is Ch. 11-B. Binding arbitration. Supranational. Individual direct claim against a government. Private party rights and obligations. Ch. 11 Panel. Disputes.

18 – against Canada. 15 – against Mexico. 17 – against U.S.

NAFTA Chapter 11 NAFTA Chapter 11 has three objectives: first, 'to establish a secure

investment environment through the elaboration of clear rules of fair treatment of foreign investments and investors'; second, 'to remove barriers to investment by eliminating or liberalizing existing restrictions'; and third, 'to provide an effective means for the resolution of disputes between an investor and the host government.'

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Part A of Chapter 11 provides the substantive obligations of the Parties concerning the treatment of investments, while Part B establishes the mechanism by which investors can resolve claims against the host government for breaching the substantive obligations.

The Substantive Obligations (Part A). The breadth of the investment chapter is addressed in the Scope and Coverage provisions (Article 1101), which has been interpreted quite broadly. Chapter 11 applies to all measures adopted or maintained by a Party relating to: (a) investors of another party and (b) investments of investors of another Party in the territory of the Party.

The first substantive obligations of Chapter 11 are national treatment (Article 1102), and Most-Favored-Nation ('MFN') treatment (Article 1103), which essentially require that each Party treat other NAFTA investors and their investments no less favorably than it treats its own investors and their investments (national treatment) or investors or investments of third parties (MFN treatment). A Party must confer the better of national or MFN treatment.

NAFTA also sets up minimum standards of treatment (Article 1105), requiring a NAFTA Party to treat investments of investors of another Party in accordance with customary international law principles, including 'fair and equitable treatment' and 'full protection and security.’ Significantly, even if a measure is not discriminatory on its face, it may still violate Article 1105, because '[t]he minimum standard described in Article 1105 does not refer to measures themselves (such as laws, regulations and decisions) but to the administration of measures.'

Performance requirements are prohibited by Article 1106. This prohibition is designed to eliminate trade distortions arising from such requirements, and to ensure entrepreneurial autonomy in investment decisions.

While the imposition of certain performance requirements as a condition for receiving incentives are specifically prohibited, requirements other than those specifically listed in Article 1106 are permitted.

Because the ability to transfer or repatriate profits and capital is vital to foreign investors, Article 1109 (Transfers) requires the Parties to freely allow all transfers that relate to investments of investors of another Party.

Article 1110 generally prohibits direct or indirect nationalization or expropriation, or measures 'tantamount' to expropriation of NAFTA investments. Article 1110 states:

(1) No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation"), except: (a) for a public purpose; (b) on a non-discriminatory basis; (c) in accordance with due process of law and Article 1105(1); and (d) on payment of compensation in accordance with paragraphs 2 through 6.

(2) Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place ("date of expropriation"), and shall

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not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.

(3) Compensation shall be paid without delay and be fully realizable.

However, certain governmental acts are specifically not expropriatory, such as compulsory licensing of intellectual property.

Furthermore, Chapter 11 explicitly excludes several listed government programs (including public education, social welfare and health) from its provisions.

It should be noted that Chapter 11 also takes steps to protect legitimate government regulations regarding the environment and public health. Article 1114 provides:

(1) Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.

(2) The Parties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures.

The Investor-State Dispute Mechanism (Part B). The second half of Chapter 11, Part B, is devoted to the investor-state dispute settlement mechanism. The NAFTA Parties have consented in advance to the jurisdiction of Chapter 11 arbitration panels by adopting and implementing the NAFTA Agreement. There are several conditions attached to the use of the investor-state dispute mechanism in Part B.

First, the claimant investor of one Party, or his investment, must have suffered loss as a result of another Party breaching a substantive provision of Part A of Chapter 11.

Claims must be brought within three years of when the investor first acquired, or should have acquired, knowledge of the breach and knowledge of the loss or damage, but may not be brought within six months of the event giving rise to the breach.

This latter provision is intended to encourage negotiations and consultations. In addition, the investor must notify the host Party at least ninety days before submitting the claim to arbitration.

The applicable arbitration rules are provided in Article 1120 (Submission of a Claim to Arbitration) and allow an investor to submit a claim under (i) the International Centre for the Settlement of Investment Disputes ('ICSID ') Convention, if both the host country and the investor's home country are parties to the Convention, (ii) the Additional Facility Rules of the ICSID Convention, if either the host country or the investor's country are a party to the Convention, or (iii) the United Nations Commission on International Trade Law ('UNCITRAL') Arbitration Rules.

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The first set of rules currently cannot apply because the United States is the only NAFTA Party that is currently a party to the ICSID Convention, and the second set of rules only applies where one party is the United States or a U.S. investor.

Of the three procedural options, UNCITRAL rules are the widest and most flexible.

UNCITRAL arbitration is available to any United Nations member state, and thus all three NAFTA Parties may use them.

The applicable substantive law is the NAFTA agreement itself and the applicable rules of international law.

There are also several procedural conditions precedent to submission of a claim to arbitration embodied in Chapter 11 itself, independent of the procedural arbitration rules selected.

The investor must, in writing delivered to the host Party, consent to arbitration in accordance with the procedures set out in the NAFTA Agreement, and must 'waive the right to initiate or continue before any administrative tribunal or court under the law of any NAFTA Party, or other dispute settlement procedures . . . except for proceedings for injunctive, declaratory, or other extraordinary relief not involving the payment of damages.'

Because Chapter 11 arbitration panels are only able to award monetary damages (plus interest) or restitution of property, investors are not required to waive their right to seek specific relief or other relief in domestic courts.

With respect to Mexico, the Chapter 11 text prohibits an investor from simultaneously submitting a claim in arbitration against Mexico and bringing a similar action in a Mexican court.

The arbitration panel is composed of three arbitrators, one appointed by each of the disputing parties and the third, the presiding arbitrator, chosen by agreement of the disputing parties, or appointed by the Secretary General of ICSID after ninety days.

Non-disputing NAFTA Parties may also make submissions to Chapter 11 panels, upon written notice to the disputing Parties, regarding the interpretation of NAFTA.

As mentioned, awards made by a Chapter 11 panel 'have no binding force except between the disputing parties and in respect of the particular case.'

The NAFTA Parties are, by agreement, expected to honor and enforce the awards of the panels within their own jurisdiction, but should enforcement in domestic courts become necessary, all the NAFTA Parties are also signatories to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the 'New York Convention ').

Mexico’s New Foreign Investment Law of 1993 Under the 1973 Investment Law, foreign investment was strictly

prohibited except in certain circumstances, such as involuntary joint ventures.

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Under the new provisions, foreign investment is defined simply as participation of foreign investment in Mexican corporations, directly or indirectly, or in activities or acts covered by law. A foreign investor is defined as anyone other than a Mexican.

Objective is to “channel” foreign investment into Mexico and see that it “contributes to national development.”

Requires charter documents of a Mexican company to contain either a “Calvo Clause” or an “exclusion-of-foreigners” clause.

Article IV allows foreign investment in any proportion in the capital of Mexican companies, acquisition of assets, entrance in new fields of economic activity or the manufacturing of new product lines, operation of establishments, etc…

Article V limits several strategic areas to the State, such as petroleum and petrochemicals, electricity, telegraph, mail, railroads, issue of currency, control of airports, etc…

Article VI reserves several strategic areas to Mexican nationals, such as radio broadcasting, banking, certain professional and technical services, transportation services, and petrol.

Article VII limits the percentage of foreign ownership in certain activities.

Exceeding the percentage caps requires approval from the Foreign Invest. Comm.

Examination by the Foreign Investment Committee Must examine impact on jobs and training of the application, the

technological contribution implied, the fulfillment of the environmental regulations, and the general contribution to the competitive position of the Mexican productive plant.

Committee’s authority is discretionary and admission of foreign investment is common.

G. ISSUES CONFRONTING THE ESTABLISHED INVESTMENT

Currency Exchange Controls Every investment in a foreign nation creates some possibility of loss (or

gain) due to the changing values of the currency of the investor’s home nation and that of the nation where the investment is made.

When the currency floats, it is possible to keep track of the changing relationship of the two currencies.

Where the currency is pegged to another it is less easily done; there is always the possibility that the government will change the rate, possibly quite substantially and without warning.

Restrictions of Foreigners’ Access to Domestic Borrowings Both domestic and foreign currency holdings may be reserved

exclusively for nationals. Allowing foreigners to compete for limited local holdings may

increase interest rates to the detriment of local traders and investors.

Such restrictions will encourage foreign investors to bring into the country only what hard currency is absolutely necessary and remove currency as soon and as often as possible.

Restrictions on Any Access to Local Borrowing of Foreign Hard Currency

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Holdings of foreign hard currency may be exclusively reserved for government use such as maintaining foreign embassies, sending government delegations to foreign conferences, purchases by state-owned companies, etc…

These controls indicate a severe shortage of foreign hard currency.

Restrictions on Access to and Transfer of Local Foreign Hard Currency Restricting ability to transfer hard currency abroad.

Often address the repatriation of capital or profits, the payment of interest on debt, or the payment for goods or technology.

Often controlled by nation’s central bank subject only to international agreements such as participation in the IMF.

Mandated Transfers from Abroad to Obtain Investment Approval Foreign investor may be required to invest so much foreign

currency in the nation. May be minimum percentage of total investment or an additional

sum to be available for local government or private domestic investor demands.

Requiring Percentage of Foreign Currency to be Deposited Locally Requires nationals to convert to local soft currency a percentage of

its foreign borrowings. Will probably encourage borrowers to purchase abroad or bring in

only what is needed for soft currency purchases.

Requiring Proceeds Abroad Returned to and Deposited in Local Institutions

Often leads to double-invoicing with part of the proceeds left in undisclosed accounts abroad, only further hurting the nation imposing the controls in collecting taxes.

Requiring that a Foreign Investor’s Demands for Hard Currency be Met by Hard Currency Earnings from Exports

This parity requirement removes a burden from the host nation to draw upon its scarce foreign currencies in allowing foreign investment to enter the country.

Transfer Pricing A multinational corporation may manipulate its intra-company (parent

→ subsidiary) pricing. Typical market mechanisms that establish prices for such transactions

between third parties will not apply. The choice of the transfer price will affect the allocation of the total profit among the parts of the company.

MNC may import finished goods or components into the country of ultimate sale at low prices, allowing the subsidiary to charge a low selling price and still earn a profit.

The low purchase price is essentially a means of financing the new subsidiary.

MNC can attempt to minimize its tax exposure, by for instance, a selling subsidiary in a high tax country charges a low invoice price to a buying subsidiary in a low tax country.

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MNC may wish to avoid reporting high subsidiary profits that would be viewed as exploitative to the nationals.

Customs and tax authorities do not coordinate their activities, and it is not unusual for customs officials to seek a high valuation and tax authorities to seek a low valuation.

Artificially Reducing Subsidiary Profits Artificially reducing a subsidiary’s profits through transfer pricing,

resulting in a diminished level of income available for reinvestment in the entity or for distribution, can constitute fraud on minority shareholders under the laws of most developed countries.

Often happens when subsidiary is joint venture with local partners or shareholders.

The distinct interest of the minority shareholders can be protected only through arm’s length pricing or it’s equivalent.

Only the US has adopted extensive/detailed regulations to be applied in individual cases.

26 U.S.C. § 482 Allocation of Income and Deductions Among Taxpayers In any case of two or more organizations, trades, or businesses

(whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of § 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.

→ Requires corporations to conduct intra-company transactions at arm’s length.

→ N.B. Applies to both inbound and outbound transactions!

Issues in Applying 26 U.S.C. § 482 In many industries, there is never an unrelated third party.

Corporations may never sell their products to anyone but their own subsidiaries, so there are no actual transactions to reference when trying to determine the price.

The lack of comparable transactions has resulted in the use of a seemingly limitless number of factors that go into calculating the “correct” price in a transaction.

Research and development costs, production/manufacturing costs, marketing, advertisement, sales, day-to-day expenses of the subsidiary, allocation of risk.

Certainly a responsible corporation will sell products at a price that covers its R&D expenses while still leaving room for a profit, but how much profit should a company expect to make? What is the appropriate period for recouping R&D expenses over the life cycle of a product?

International Bankruptcy

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Increasing numbers of transnational insolvency proceedings have placed a burden on courts in various countries to engage in creative and innovative responses to specific challenges.

Reform efforts are proceeding by treaty, by harmonization and by coordination.

Moratorium A general stay is found in most insolvency systems worldwide and is

essential to orderly liquidation and successful reorganization/rehabilitation.

Ensures court control in each country and by preventing individual action it promotes consultation and possible agreement among creditors – incentives to find solution.

Opportunity for creditor consultation and agreement is of critical importance in cross-border cases where there are few legal rules and precedents.

Standing/Title for Liquidator In some jurisdiction the trustee merely has control, with title

remaining with the debtor. Even the most cautious approaches to insolvency cooperation

involve some recognition of the foreign liquidator’s rights.

Information Sharing Highly desirable to have methods of judicial communications not

dependent on parties. Most countries require extensive disclosure by the debtor and this

information should be available to the courts and parties in each interested jurisdiction.

Creditor Involvement Most countries give national treatment to foreign creditor claims,

but there are very few provisions relating to fair representation of foreign interests and communication.

Subsidiary’s creditors might try to force an involuntary bankruptcy on the corporation before the parent has an opportunity to try and consolidate one proceeding, allowing them to have the process take place in their home jurisdiction.

Coordinated Claims Procedures Highly desirable to adopt uniform procedures for cross-filing and

marshalling. Cross-filing permits the trustee in each proceeding to file in

every other proceeding on behalf of all creditors in the proceeding in which the trustee was appointed.

Marshalling rules limit recovery by a creditor in a given proceeding with reference to amounts the creditor has recovered in proceedings in other jurisdictions, so that the creditor cannot receive more than other creditors of the same class.

A de facto worldwide system of distribution.

Priority/Preferences The Istanbul Treaty provides that creditors entitled to priority in

distribution under local law should be paid from local assets, and

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what remains should be returned to the main proceeding, where the priorities of the main jurisdiction’s law will govern.

Discharge Very few cases regarding the transnational effect of a discharge. For example, a creditor free to enforce its pre-existing, pre-

reorganization rights against a corporate debtor in jurisdiction B, despite a discharge in the reorganization approved in jurisdiction A, would effectively bar the debtor from operating in jurisdiction B and the prospect might make the reorganization impossible.

Two Main Approaches Territorialist.

The court of each country administers the assets within that country according to their own laws, often without regard to the proceedings in another country involving the same debtor.

Universalist. The court in the “home” country administers, or at least

attempts to administer, all of the debtor’s assets, wherever they may be found, and distributes them according to the substantive law of the debtor’s home country.

The US notoriously subscribes to the universalist approach.

Chapter 15 of the US Bankruptcy Code Not just procedural; it also creates new substantive statutory rights

for, as well as constraints on, foreign and domestic debtors and creditors in cross-border proceedings.

Courts interpreting Ch. 15 are directed to “consider its international origin and the need to promote an application of [Ch. 15] that is consistent with the application of similar statutes adopted by foreign jurisdictions.”

Applies not only where a foreign representative commences an ancillary case, but also where a foreign representative or creditor seeks to commence a plenary bankruptcy case in the US, assistance is sought in a foreign country in connection with a US bankruptcy case, and a foreign proceeding and a bankruptcy case in the US are pending concurrently.

UNCITRAL’s Model Law on Cross-Border Insolvency Greatly influenced the drafting of Chapter 15.

H. PROJECT FINANCING

Basic Structure Project finance is nonrecourse financing predicated on the merits of a

project rather than the credit of the project sponsor. The credit appraisal is based on the underlying cash flow

projections. Project sponsor has no direct legal obligation to repay the project

debt or make interest payments if the cash flows prove inadequate to service the debt.

The contracts involved in the project constitute the framework for project viability and risk.

Based on predictable regulatory, political environments and stable markets.

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Advantages/Disadvantages of Project Finance Nonrecourse nature of financing provides financial independence to

each project owned and protection of the sponsor’s general assets from difficulties in any project.

Off-balance sheet debt treatment can be beneficial for parent company’s financial statements.

Ability of sponsor to finance project using highly leveraged debt without a dilution of existing equity (e.g., leverage percentage often between 75 to 80 percent).

Avoidance of restrictive covenants in other transactions. Favorable financing terms might be available to the project but not the

sponsor individually. Due to complex nature and high risk, lender fees and interest rates are

often higher. Greater degree of supervision imposed on the management and

operation of the project.

Financing Sources Sources of funds include equity, senior/junior loans, and the capital

markets. Equity often includes investment funds, multilateral institutions like

the IFC, regional development banks and international and local equity markets.

Debt often includes syndicated loans, institutional investors, the IRC, investment departments of regional development banks, international and local bond markets, and supplier’s credit.

International Finance Corporation Established in 1956, it is the World Bank’s private enterprise

development arm. The IFC will lend directly to private companies and cannot accept

repayment guarantees from host country governments. IFC syndication gives commercial bank the comfort they require to

extend commercial loans in developing countries.

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As the lender of record, the IFC has special privileges as a multinational institution that will extend to the commercial banks – exempt from payment of local taxes, insulated against political risk and possible greater access to local leadership.

Capital Markets SEC Rule 144A permits certain qualified institutional investors to

purchase securities not registered with the SEC. Foreign companies issue equity in the US by means of American Depository Receipts issued by a US Bank.

Publically offered bonds must be registered with the SEC and the borrower must be rated by a credit rating agency.

May create potential issues not present in commercial lending, i.e., negative carries.

Eurobonds can be issued in any convertible currency and sold to institutional investors.

Risk Identification and Mitigation Three causes for project failure exist during the design engineering and

construction phases of the project: (i) a delay in the projected completion of the project and the resultant delay in the commencement of cash flow, (ii) an increase in capital needed to complete construction, and (iii) the insolvency or lack of experience of the contractor or a major supplier.

Six basic risks that generally exist in the start-up and operating stages of the project: (i) technology failure or obsolescence, (ii) changes in law, (iii) uninsured losses, (iv) shifts in the availability or price of raw materials, (v) shifts in demand or price of output, and (vi) negligence in project operation.

Risk Mitigation Limited guarantees can be used to provide the minimum

enhancement necessary to finance a project (i.e., cost overrun guarantees).

Letters of credit can be used to guaranty the creditworthiness of a party.

Surety obligations provided by the contractor can ensure that the project will operate at a certain level – the risk passed off to a surety that issues performance and payment bonds.

Political Risk Insurance Limited guarantees can be used to provide the minimum

enhancement necessary to finance a project (i.e., cost overrun guarantees).

Multilateral Investment Guarantee Agency (MIGA) provides inconvertibility/transfer risk coverage for lenders covering 95% of the risk.

MIGA would traditionally insure project lenders only if a project sponsor also insured its equity investment.

Some lenders prefer to insure with OPIC which can reinsure with MIGA.

MIGA’s coverage does not cover devaluation risk. A lender is eligible for MIGA coverage if it is incorporated and

has its principal place of business in a member country

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(currently 151 member countries) or if it is majority-owned by nationals of member countries.

Multilateral “B Loans” are made by a multilateral agency such as the IRC or IDB which is 100 % participated out to a commercial bank or a syndicate of banks.

Because the loan is made under the multilateral’s umbrella, it is perceived to have the same preferred creditor status asserted by multilateral agencies generally.

Force Majeure Extraordinary events independent of the parties’ will that cannot be

foreseen or averted by them even with due diligence, being beyond their control and preventing the Contracting Parties or Party from fulfilling the obligations undertaken in the contract.

Examples: Storms, earthquakes, tornadoes, hurricanes, war, civil unrest.

A standard force majeure clause in a K requires: The circumstances or event be external; It must render performance radically different from that

originally contemplated; It must have been unforeseen (subjective) or unforeseeable

(objective); and Its occurrence beyond the control of the party concerned.

UCC standard: Commercially impracticable standard. Increase in cost is not impracticable unless the rise in costs is

due to some unforeseen contingency that alters the essential nature of the performance.

i.e. not a rise or collapse in the market, but a severe shortage of raw materials due to a war, embargo, crop failure, shutdown of major sources of supply.

French Law: Impossible standard. Irresistibility.

A force that is superior to that of man, making the execution of a contract totally impossible.

This encompasses both natural phenomena, as well as man-made occurrences.

The essence of this concept lies in the contracting party’s inability to do anything about the turn of events.

The judge applies the standard of whether any person placed in the same situation, as the contracting party would have been similarly unable to overcome the obstacles presented.

Difficult performance is not an excuse – it must be insurmountable.

Unforseeability. The event must have been absolutely fortuitous. If it could have been foreseen, or even suspected, and the

party could have adopted measures to avoid or prevent the problem, then this aspect would not be met.

Reasonable person standard is applied. Externality.

It must have come about through no action – direct or indirect – of the contracting parties.

It must not only be outside the circumstances of the particular contract but also outside the parties’ sphere of activity.

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Therefore, defects in products cannot amount to force majeure, nor can actions of employees, poor construction of buildings, or bankruptcy.

Procedure. If a party is excused from performance by force majeure, the

debtor is released from claims of the creditor. No damages are recoverable for nonperformance of the K. If only part of the K is rendered impossible, then the rest of

the K must be carried out. If the conditions that render the contract impossible are only

temporary, then the K is suspected until the condition is remove.

UNIDROIT – Hardship Where performance of a K becomes more onerous for one of the

parties, that party is nevertheless bound to perform its obligations.

Excused performance when “Hardship.” When the occurrence of events fundamentally alters the

equilibrium of the K either because of the cost of a party’s performance has increased or because the value of the performance a party receives has diminished,

AND the events occur or become known to the disadvantaged party after the conclusion of the K.

Summary: (i) the events could not have been reasonably known, (ii) are beyond the control of the disadvantaged party, (iii) and the risk of the events was not assumed by the disadvantaged.

Procedure. The disadvantaged party may request renegotiation of the K,

but is not entitled to withhold performance. If a court finds hardship, it may terminate the K or adapt the

K with a view to restoring its equilibrium. NOTE: same as UCC and common law. Nonperformance is

excused if due to an impediment beyond the party’s control that could not reasonably be expected to have taken into account at the conclusion of the contract.

DISPUTE RESOLUTION

A. FUNDAMENTAL ISSUES AND PATTERNS

Resolution of International Business Disputes

Service of Process Plaintiff in international litigation must think of complying with the

service of process laws of at least two nations, where plaintiff has filed suit and where defendant is located.

Hague Convention on Service Abroad. Signed by nearly 50 nations. Each signatory designates a private company as the Central

Authority to receive requests from other participating states to carry out service in their state.

Several nations have made declarations or reservations prohibiting service by mail in their jurisdiction.

This has significant effect on the use of substituted or constructive service by US plaintiffs, where documents may

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have to be transmitted abroad to complete the service process.

Forum Non Conveniens Concept is foreign to most civil law jurisdictions.

EU finds its use to be inconsistent with obligations under EU jurisdiction regulations.

Many Latin American countries are blocking its use by implementing legislation that removes local jurisdiction if a national first filed suit in the United States – the theory being that the filing in the US terminates what would otherwise be valid jurisdiction in the home nation and therefore the US court could not dismiss the case because there was an available foreign forum.

Private considerations include where evidence is located and getting it to the forum, movement and inconvenience of bring parties, witnesses and experts to the forum; the need to translate documents and testimony; the ability to implead third party defendants; and implications from fragmenting the suit if it were dismissed in favor of different nations of different plaintiffs and non-US defendants.

Public considerations include each nation’s interest in being the location of the litigation, the burden on the court system and the interest/competence of jurors serving and sometimes deterring US companies from producing defective products for export.

Gathering Evidence Abroad Nations have often used letters rogatory to gain evidence,

essentially constituting a request to the foreign nation’s court to assist in obtaining the evidence.

Extensive requests from the US have led many nations to enact “blocking” laws that prohibit nationals from complying with such requests, or even making it a crime to ask for documents to be used in foreign proceedings.

Hague Convention on Taking Evidence Abroad. Adopted by about 40 nations. Convention tries to meet the needs of the forum court to obtain

evidence that the court considers admissible while not imposing upon the foreign parties or sources of evidence demands that are overly excessive under the rules of their nation.

US Supreme Court has held that use of the convention is optional and that there is no need to use the convention first before using US rules.

B. CHOICE OF FORUM AND JURISDICTION

US Forum Selection Approach

M/S Bremen v. Zapata Off-Shore Facts: Zapata (P), U.S. corporation contracted with M/S Bremen (D)

and a German corp. (D) to have drilling rig moved from Louisiana to Italy; when weather caused damages, Zapata (P) sued for damages in U.S. and did not honor forum-selection clause in contract.

Holding: A freely negotiated private international agreement, unaffected by fraud, undue influence, or overweening bargaining power, should be given full effect.

A contractual choice-of-forum clause should be unenforceable if enforcement would contravene a strong public policy.

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Zapata did not clearly show that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching.

We must give way to an approach more in keeping with the increasing involvement of American business and industry overseas.

Carnival Cruise Lines v. Shute Facts: Shute (P) purchased ticket from Carnival Cruise (D) travel

agent in Washington. Shute was injured on board ship in international waters and attempted to sue Carnival in Washington.

Holding: Court upheld forum clause in contract stating that all disputes arising under the contract were to be litigated in Florida.

Clause was “reasonable.” Clause created certainty for the parties involved, conserved

judicial resources, and saved money. Plaintiffs did not satisfy heavy burden of proof required to set

aside clause on grounds of inconvenience. Florida was not a remote alien forum.

Bonny v. Society of Lloyd’s Facts: Bonny (P) and other U.S. investors filed suit in U.S. District

Court against Lloyd’s (D) for alleged securities law violations, despite a forum and law selection clause in agreements naming England as site of jurisdiction.

Holding: A forum selection clause in a securities-related contract will be enforced if the chosen forum affords investors redress for their claims.

The fact that an international transaction may be subject to laws and remedies different or less favorable to those of the U.S. is not alone a valid basis to deny enforcement

US Approach to Jurisdiction

International Shoe and It’s Progeny Int’l Shoe → minimum contacts standard. World-Wide Volkswagen → purposeful availment standard for

personal jurisdiction; defendants cannot be haled into court in a jurisdiction with which their only connection is the “unilateral activity” of the plaintiffs.

Keeton/Burger King → assertion of jurisdiction is constitutional where the defendants created the relationship with forum state.

Perkins/Helicopteros → weighed question of assertions of general jurisdiction over aliens.

Asahi → first time since the Court’s adoption of the purposeful availment standard, the Court denied jurisdiction over a defendant that had purposefully availed itself of the benefits and burdens of doing business in the forum. Minimum contacts were held to be a necessary but not sufficient condition for the constitutional assertion of jurisdictional authority. Fairness and substantive justice were also tests that must be passed.

European Union Approach to Jurisdiction

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Brussels Regulation Article 2 (General Jurisdiction).

Applies to persons domiciled within a member state without regard to nationality.

Articles 5 and 6 (Special Jurisdiction). Allow a person domiciled in one member state to be sued in

another member state. Article 5.

Contract matters: grants jurisdiction to the courts for the place of performance of the obligation in question (Article 5.1.a).

Place of performance in: Sale of Goods: where the goods were delivered or should

have been. Provision of services: where the services were provided or

should have been (Article 5.1.b). Article 6.

(1) One of a number of defendants with closely connected claims (2) third party (3) on a counter-claim arising from the same contract (4) In matters relating to the contract, if the action can be

combined with an action against the same defendant in matters relating to right in rem in immovable property, in the court of the member state in which the property is located

Court/Defendant v. Court/Claim Nexus The foundation of the “special” jurisdiction rules is the Court/Claim

nexus as opposed to the Court/defendant nexus, which is the basis of general jurisdiction.

The European Court held in an action in both Tort (Article 5(3)) and Contract (Article 5 (1)) that the jurisdiction over the tort claim derived from (Article 5(3)) did not extend to the contract claim – Kalfelis v. Schroder.

Reasoning: the basis of the Article 5(3) tort rule of jurisdiction is the close connection between the dispute and the court (court/claim nexus) – Shevill.

Three Rules of Interpretation: Brussels Convention Article 2 jurisdiction is more “general” than the special

jurisdiction rules (ex. Articles 5 and 6) – Court/Defendant Nexus.

The special jurisdiction rules (Articles 5-16) should be narrowly interpreted.

The rules of special jurisdiction are based on a “close connecting factor between the dispute and the courts.” – Court/Claim Nexus.

Problem with Court/Claim Nexus. Interpretation of Article 5(3) rule providing jurisdiction in the

“place where the harmful event occurred.” Interpretation of Article 5(1) rule establishing jurisdiction in the

courts of the “place of performance of the obligation in question.”

Bias towards the courts of the plaintiff’s domicile in granting jurisdiction. Dumez.

Jurisdiction and Venue in European Civil Law Systems

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Civil procedure is a matter of federal law everywhere but Switzerland.

International competence is rarely distinct from territorial competence.

Exception: In Austria there is an additional requirement that the case be related to the state of the court addressed.

No association between Jurisdiction and Service of process. The ability to service a defendant has no connection with

jurisdiction. If defendant fails to appear the court must verify whether or not

it has jurisdiction. Plaintiff must provide sufficient evidence for the facts on which he

wants to base the jurisdiction of the court. A court may still exercise jurisdiction in the absence of service of

process if it turns out to be impossible . Germany: Last resort to service of process is publication in a

newspaper and posting it on the courts official board. France: Service may be made with an official whose normal

function is public prosecution. Civil Law countries lack Long-Arm Statutes because there is no

concept of jurisdiction distinct from venue. European Courts establish jurisdiction over categories of lawsuits

and categories of people as defined by the respective provisions in the state’s code of civil procedure.

General v. Specific Jurisdiction in Europe General Jurisdiction: based on the defendants’ permanent residence. Specific Jurisdiction: determined by the codes of civil procedure of

the various civil-law countries. Tort: Where a tort occurs is recognized as a good location for

lawsuits in virtually all civil law countries. Contract: Doing business in a particular jurisdiction is not sufficient

to establish jurisdiction. There must be an actual branch or other establishment of the foreign debtor in the respective country.

No doctrine of forum non conveniens. A court having jurisdiction is committed to exercising it. Europe has no rule against ousting the jurisdiction of a court.

In France, every French citizen may sue his opponent in France if the underlying legal relationship is contractual.

In Germany and Austria any person with assets located in a particular jurisdiction may be sued there.

Juenger’s View of US Jurisdictional Jurisprudence While scholars – unlike practitioners – revel in uncertainty, even in

academic circles the applause and admiration for the Court’s forays into the field of jurisdiction have long ago given way to a distinct disenchantment.”

If the Supreme Court’s rulings on this issue are flawed, they should not be used as our model for international cooperation.

The Supreme Court generally ignores the complex differences between transnational and interstate jurisdictional issues.

The Supreme Court is overly concerned with the assumed interrelationship between due process and state sovereignty and oblivious to the realities of international affairs.

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The US Supreme Court is ignoring the possibility of a global approach to jurisdiction and judgments recognition.

The EU has made great strides in this area with the Convention on Jurisdiction and the Recognition of Judgments in Civil and Commercial Matters.

Bars powerful enterprises from imposing forum-selection clauses on consumers.

Allows for multi-party litigation in a single forum. Case law in general is clearer in the ECJ than the nebulous and

somewhat unpredictable standards identified by the US Supreme Court.

Supreme Court case law creates a barrier to international harmonization and prevents us from effectively dealing with other nations.

Brussels Regulation – Article 23 One of the parties, one of which is domiciled in a Member State has

agreed that a court of a member state is to have jurisdiction. Such Jurisdiction will be exclusive unless otherwise agreed. How to establish jurisdiction: (a) In writing or evidenced in writing;

(b) in a form which accords with practices which the parties have established between themselves; or (c) in international trade or commerce, in a form which accords with a usage of which the parties are ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned.

C. ENFORCEMENT OF FOREIGN JUDGMENTS

Common Law At English common law, a money judgment rendered in a foreign

country was subject to impeachment by the English court. Hilton v. Guyot (1895).

Diverged from English common law. Where there is no prejudice, fraud or lack of due process, the merits

of the case should not be tried again in the US. However, the judgment was denied enforcement because “mutuality

and reciprocity” were not available for US judgments in France.

State Law Because actions brought in federal court are dependent on state law

(Erie v. Tompkins) and Hilton was not Constitutional doctrine, state courts have felt free to pursue other analyses and doctrines.

Uniform Acts

Uniform Foreign Money-Judgments Recognition Act Inconsistent and sparse state law ultimately led to the Uniform

Foreign Money-Judgments Recognition Act (UFMJRA) in 1962. 47 states eventually adopted it. Purpose was to bring uniformity to the results of cases and to

furnish states with a coherent and consistent set of rules.

Uniform Foreign-Country Money Judgments Recognition Act of 2005

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Important differences: (i) party seeking recognition has the burden of proving the judgment is subject to the new Act; (ii) party objecting to recognition and raising specific grounds has the burden of proving those grounds; (iii) prohibition of the action if the judgment may no longer be enforced in the country of the judgment.

5 states have replaced the UFMJRA with the UFCMJRA.

Recognition v. Enforcement Courts may give one of two effects to a foreign judgment:

Recognize the judgment. If judgment is limited to recognition, the court has decided

that the issue or issues do not need to be re-litigated. Enforce the judgment.

If judgment is enforced, the successful party is granted some or all of the judgment decreed by the foreign court

Application of UFCMJRA Society of Lloyd’s v. Turner (2002)

“A foreign country judgment is not conclusive if…the judgment was rendered under a system that does not provide impartial tribunals or procedures compatible with the requirements of due process of law.”

Foreign proceedings need not comply with the traditional rigors of American due process – must be fundamentally fair and not offend against basic fairness.

A court is provided with discretion not to enforce a foreign country money judgment if “the cause of action on which the judgment is based is repugnant to the public policy of the state.”

Standard for non-recognition is whether the cause of action is repugnant to state policy, not whether the standards for evaluating the cause of action are the same or similar in the foreign country.

Bank of Nova Scotia v. Tschabold Pac. West moved for non-recognition of a Canadian judgment

pursuant to the UFMJRA. Arguments: Fraud §4(b)(2); Contrary to Agreement by Parties to

Resolve Matter Outside of Court §4(b)(5); Seriously Inconvenient Forum §4(b)(6); Repugnant to Public Policy §4(b)(3); and Violation of Due Process §4(a)(1).

Fraud §4(b)(2) . A foreign judgment need not be recognized… if the judgment was obtained by fraud. Resolution: Court distinguishes between extrinsic and intrinsic fraud (cmt 7 of UFCMJRA). Only extrinsic fraud is basis for denying recognition of a foreign judgment. No evidence that a false statement was deliberately made to the court (extrinsic fraud). Intrinsic fraud assertion involving the merits of a case should have been dealt with in the Canadian court.

Contrary to Agreement by Parties to Resolve Matter Outside of Court §4(b)(5). Pac West argues that Tschabold stated it would “take care of” the Canadian case. Resolution: §4(b)(5) allows a court to refuse recognition when the foreign proceeding was contrary to an agreement between the

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parties to settle the dispute outside of that court. In this case, the defendant entered into an agreement with a codefendant and the court held that this provision only applies to adverse parties.

Seriously Inconvenient Forum §4(b)(6) . Pac West argues that since it was brought into the Canadian action by personal service, this section of the Act is an alternative basis for non-recognition of the Canadian judgment. Resolution: This provision applies when a court’s jurisdiction is based only on personal service. Court held that Pac West confused personal jurisdiction with personal service.

Repugnant to Public Policy §(4)(b)(3) and Due Process §(4)(a) (1). Pac West argues that due process principles and the public policy of WA state require a defendant to be informed of the claim against him and because Pac West was not informed of the claim the motion for non-recognition should be granted. Resolution: Court held that Pac West had an opportunity to litigate issues in the foreign forum and is therefore precluded from collaterally attacking the resulting judgment in the recognition state.

Canada FrancePrinciples Comity principles

similar to those used by the United States.

Canadian court applies an “international” standard which limits recognized jurisdiction to five bases

Absent an international agreement to the contrary, a foreign judgment in order to have res judicata effect needs an exequator

Requirements for

Recognition

International Standard:1) Subject of the country in which the judgment is rendered;2) Resident of country when action began;3) Defendant selected forum in which he was sued;4) Voluntary appearance;5) Where he contracted to submit himself to judgment of the foreign court

Exequator:1) Judgment must be rendered by a court having jurisdiction under French rules;2) Must comply with minimum standards of procedural fairness;3) Must apply the “correct” law that would have been applied by French court;4) Must not violate public policy;5) Must be capable of immediate enforcement in the place of its origin

Choice of Currency

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Restatement (Third) of the Foreign Relations Law of the United States (1987))

Traditionally, United States has rendered money judgments payable in United States dollars only (§823 cmt b.).

§ 823(1): Courts are allowed to render judgment in the currency in which the obligation is denominated or the loss was incurred.

§ 823 (2): The conversion from foreign currency to dollars should be made at such rate as to make the creditor whole and to avoid rewarding a debtor who has delayed in carrying out the obligation.

When to Convert Foreign-Money Judgment Breach Day Rule.

Favorable to plaintiff (claimant) if foreign currency is depreciating against the US dollar since the breach → the earlier the conversion, the higher value it will have in terms of US dollars

Restatement tentatively adopts breach day rule if the foreign currency depreciates since the breach (if it has appreciated, then it adopts the exchange rate on the date of judgment or date or payment) → avoid rewarding a debtor who has delayed in carrying out the obligation.

Judgment Day Rule. Converting foreign obligation on the exchange rate on the date

the foreign court entered judgment. Revised NY statute. Federal courts in suits based on obligations existing under

foreign law where the debt is payable in foreign currency. Payment Day Rule.

Apply the exchange rate on the date that the defendant actually makes the payment.

Favorable to the debtor if the foreign currency is depreciating against the USD since the breach → the later the conversion, the debtor’s obligation in terms of USD decreases.

The least discrepancy between actual loss and the amount recovered (make the claimant “whole”).

MA Law, Uniform Foreign-Money Claims Act.

Uniform Foreign-Money Claims Act Adopted in the District of Columbia, the U.S. Virgin Islands, and in

21 states (as of 2008). NY and MA have not adopted the Act. Only applies to foreign-money claims (§2)

Problem 11.4: Even though the loss was incurred in USD, the court entered judgment based on CAD.

Rationale for Introducing the Act. Increase in international trade and cross-border transaction. More fluctuation in values of foreign moneys as compared to the

United States dollar. US jurisdictions treat recoveries on foreign-money claims

differently than most of its major trading partners. US jurisdictions: breach day rule or judgment day rule. Other countries: payment day rule.

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Prevent forum shopping and creates uniformity and certainty in the law.

§ 1 Definitions. “Conversion date” means the banking day next preceding the

date on which money is…paid to a claimant. “Foreign money” means money other than money of the United

States of America. “Foreign-money claim” means a claim upon an obligation to pay,

or a claim for recovery of a loss, expressed in or measured by a foreign money.

§ 10 Enforcement of Foreign Judgments. If [the foreign-money] judgment is recognized in this state as

enforceable, the enforcing judgment must be entered as provided in Section7… → connects the issue of recognition and enforcement of a foreign judgment.

§ 7 Judgments and Awards on Foreign-Money Claims; Times of Money Conversion; Form of Judgment.

A judgment or award on a foreign-money claim is payable in that foreign money, or at the option of the debtor, in the amount of United States dollars which will purchase that foreign money on the conversion date at a bank-offered spot rate.

§ 6 Asserting and Defending Foreign-Money Claim. An opposing party may allege and prove that a claim…is in a

different currency than that asserted by the claimant.

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