The International Legal Environment of Business

The International Legal Environment of Business Chapter 22 Meiners, Ringleb & Edwards The Legal Environment of Business, 12th Edition

International Law and Business • International Trade Agreements • U.S. Import/Export Policies • Business Structures in Foreign Markets • Foreign Corrupt Practices Act • International Contracts • International Dispute Resolution

The International Business Environment • Includes all business transactions that involve entities from two or more countries • Movement of goods across countries • Movement of services across countries • Issues regarding capital • Issues regarding personnel of multinational enterprises • Differences include risks in • Financial • Political • Regulatory

Origins of International Law • Commercial codes date back to Egypt in 1400 B.C. • Early trade centered around law of the sea • Greek/ Roman Empires both had codes of international trade • Middle Ages: Lex Mercatoria (Merchant Law) – Governed trading customs in Europe • Today’s codes still partially derived from early efforts

Sources of International Law • Individual countries create their own laws • Trade agreements between countries • Worldwide/regional organizations, i.e. • United Nations • European Union (EU) • No universal international court system for resolving international conflicts of businesses • Difficult to enforce decisions and contracts • See Exhibit 22.1

International Trade Agreements • Improve economic relations of countries • Cover variety of commercial issues • Tax agreements prevent double taxation • Examples: • North American Free Trade Agreement (NAFTA, 1992) Canada/US/Mexico • Regional treaty • General Agreement on Tariffs & Trade (GATT) replaced in 1995 by World Trade Organization (WTO) • International Treaty • WTO has authority to investigate & rule on government subsidies that give unfair advantage to producer in a country • Also looks at countervailing measures • Helps with worldwide protection of intellectual property

U.S. Import Policy • Limits on imports • To protect domestic interests • Taxes on imports • Tariffs (Duties)– Taxes imposed by a government on imported goods • Specific tariffs: fixed duties on products • Ad valorem tariffs: % of price of product • Harmonized TariffSchedules – Standardized, worldwide classification of goods for customs officials • Harmonized Tariff Schedule of the United States (HTSUS) • Each country uses same codes • Bans on Certain Products – i.e. weapons, illegal products, narcotics, national security concerns, products made from endangered species

CaseUnited States v. Mead Corporation • Mead imported “day planner” calendars. Under the tariff (HTSUS) – general heading for “registers, account books, notebooks . . .and similar articles.” Under subheading 4820.10 “diaries, notebooks and address books” subject to 4.0% tariff. Another subheading was for “other” items NOT subject to a tariff. • “Other” heading applied to planners until 1993. Customs changed classification to “diaries” and applied 4% tariff. Mead protested, but Customs did not change. • Mead sued in Court of International Trade (CIT). Court granted summary judgment for Customs. Mead appealed to Court of Appeals for Federal Circuit. • It reversed. Held classification by Customs do not get high level of deference to some regulations because Customs can change classification without formal notice-and-rule process that occurs for most substantive regulations. • Also held planners were not “diaries”, as those defined as bound volumes. Planner was a three-ring binder, so should be classified as “other” and no tariff. Customs appealed. (Continued)

CaseUnited States v. Mead Corporation • U.S. Supreme Court HELD: Judgment vacated and remanded for further proceedings. • Court of Appeals for Federal Circuit ought have looked at these issues: • Notice-and-comment procedures seen by Customs only when “changing in practice” to • Produce a tariff increase OR • In the imposition of a restriction/prohibition, OR • When Customs Headquarters determines matter is important to “interest of domestic industry”. • Classification rulings are best treated like “interpretations contained in policy statement, agency manuals and enforcement guidelines”. • Customs can bring the benefit of specialized experienceto bear on the subtle question in this case.

Import Controls • In U.S. – Dept. of Commerce through International Trade Administration (ITA) & International Trade Commission (ITC). • Some imports are prohibitedfor safety or environmental reasons. • Banson certain products: such as explosives, weapons, illegal products such as narcotics • Antidumping Orders:When there is charging a lower price in an export market than in a home market. Duty is determined by comparing market price in home market vs. price charge in U.S. when item is imported, then duty is applied to product. • Duties on Governmental Subsidies: Tariff applied to offset subsidies provided by foreign governments to their industries that lower prices of products imported into the U.S. Duty applied is = to foreign governmental subsidy. (Purpose: To assist U.S. products to be competitive in the U.S. market) (counterveiling duties). • Foreign Trade Zones: Goods imported without paying tariffs. Goods then processed/assembled. Duties assessed upon leaving zone. • Duty Free Ports: No duties or tariffs assessed on products, i.e. Hong Kong.

Export Promotion and Restrictions • Federal/State governments • Commerce Department helps promote exports through ITA activities. • Commerce Control List will specify controls, if export allowed, and licensing required for exporting an item. • Export Restrictions, if goods, for instance: • (1) Injure domestic industry • (2) Jeopardize national security • (3) Conflict with national policy (i.e. goods to support terrorist activities) • Arms Export Control Act implemented through Traffic in Arms Regulations imposes restrictions on exports of weapons and technology that can be used as weapons.

Export Promotion and Restrictions • Commodity Control List • List of goods subject to restricted licenses • If item is not on Export Administration Regulations list, then not subject to special control. • Application to Reexported U.S. Goods • Commerce licensing requirements apply • Goods that U.S. may not want imported from country #1 exported into country #2 (favored country); then reexported from country #2 into country #3, i.e. U.S. (May violate U.S. licensing regulations)

Penalty Provisions • For violation of commerce’s licensing provisions • Include criminal and civil penalties • Can also have administrative sanctions • If an exporter knowingly violates the Export Administration Act, there can be fines up to $50,000 per violation. • Person who “willfully” violates the Act, can be fined more and receive up to 20 years in prison, with a possible suspension or revocation of a business’s authority to export. • Example: ITT fined $100 million for selling sophisticated night-vision goggle technology to firm in Singapore that sold technology to China.

Foreign Manufacturing • Wholly Owned Subsidiary • Business owns the facilities – some countries limit % of ownership • Joint Venture • Sharing ownership with foreign partners • Licensing Agreement • Licensor grants licensee access to patents and technologies • Franchise Agreement • Franchisor grants franchisee the rights to sell products or services, i.e. McDonald’s, Hertz • Contract Manufacturing • Contract made for production of products • Issues to Consider • Labor expenses • Shipping costs • Raw material costs • Avoid restrictions/tariffs • Pirating of technology

The Foreign Corrupt Practices Act (FCPA) • Punishment of payerof bribe to foreign officials • “Corrupt”person displays reckless or conscious disregard for consequences of one’s actions • Accounting provisions require practices to track transactions • Payerknowspayment will go to public official • “Any reasonable person would have realized” • Requirement: Keeping accounts. Internal controls. Need paper trail. • “Consciously chose not to ask about what he/she had reason to believe would be discovered” • “Simple negligence” or “mere foolishness” exception • “Routine Governmental Action”Exception: “facilitating or expediting payment . . . the purpose of which is to expedite or secure the performance of a“routine governmental action.”(i.e. visas, providing basic utilities, transportation services, etc. – small amount and very limited usage) • In 2006 Congress ratified theUN Convention Against Corruption to bring international cooperation to corruption enforcement practices.

Penalties • Individuals: Maximum of $100,000 & 5 years in jail • Corporation: Up to $2,000,000/violation • Exception: Department of Justice “pre-deal interpretation” • Watch: “Slush funds” or “salaries, commissions or fees” disproportionate to service provided • German company Siemens agreed to pay an $800 million fine • Paid large bribes to government officials in Argentina in an effort to win contracts. • 8 Siemens’ executives & contractors also charged

CaseUnited States v. King • Owl Securities and Investments (OSI) of Kansas City was raising funds for large land development in Costa Rica. • FBI investigated King, largeOSI’s investors. Kingsley (OSI executive) tape recorded conversations. King convicted of planning a bribe to a senior Costa Rican official for rights to develop land. • Fined $60,000 and sentenced 30 months in prison under the FCPA. • Appealed to U.S. Court of Appeals. • HELD: Affirmed. Ample evidence to support jury’s conviction • Tape recordings: “I think we could pay the top people enough, that the rest of the people won’t bother us any. That’s what I’m hoping this million and a half dollars does. I’m hoping it pays for enough top people.” • Knowingly participated in, approved of and acted to further conspiracy to offer the bribe. Six witnesses over 5-day period and other exhibits supported jury’s conviction.. • Guilty of conspiracy and violations of FCPA.

International Contracts • Cultural Aspects • Sensitivity to cultural differences in contracting an attitudes toward relationships • Language differences create barriers, especially when contract involves multiple languages • Financial Aspects • Method of payment concerns re: removing profits from countries in which business is conducted • Exchange Markets • Risk in timing in currency exchanges • Financial Instruments • May differ from country to country • Use of Letters of Credit: Assurance by bank of buyer to pay seller upon receipt of documents that prove goods were shipped and contract was fulfilled – Revocable or Irrevocable

International Contracts • Financial Aspects (continued) • Exchange Controls • Different countries exchange controls – can affect decision where to locate assets • Transfer Pricing • Multinational firm sells goods from division located in one county to a division in the U.S. • Must determine price, but because it is within the firm, there is no “market price” to use • Firm creates an artificial price • Practice called transfer pricing • IRS has guidelines as to what it considers “reasonable” for taxing purposes

Key Clauses in International Contracts • Payment Clauses & Exchange Rates • Choice of Language Clause • Force Majeure Clauses • Choice-of-Law Clauses • Selection of Which Laws Apply • Forum Selection Clause • Selection of Court • See Exhibit 22.5

Loss of Investment • Nationalization: Gov’t “nationalizes” entire industry, including foreign investment • Gov’t may pay less than value • Example: Venezuela nationalized ExxonMobil holdings in country in 2007 – Paid only $255 million of $900 million owed and refused to work with Exxon • Expropriation: Taking foreign property in accordance with international law • Confiscation: Taking is unlawful • Insuring against Risk of Loss • All risk insurance policy • Provides financial relief in event of nationalization & other problems • Short-term private insurers • Available for most investments • Risks • i.e. Blockages, embargoes, arbitrary decisions • Major insurers(Lloyds of London) • Gov’t agencies (i.e. Overseas Private Investment Corporation [OPIC]) insures investors who invest in less developed countries

International Dispute Resolution • Litigation • Differs within countries • Complication of evidence, witnesses and documents • Judicial system may be different from country to country • Some courts more influenced by political pressures • Not enforceable outside of country • Treaties/Conventions may assist potential parties • Contract clauses assist courts in enforcement of claims • Usually need “minimum contacts” for jurisdiction

International Dispute Resolution • International Court of Justice (ICJ) • Only nations have standing - not individuals • Nations “may” make claims on behalf of persons • No mandatory compliance requirement • UN Security Council must enforce • Arbitration: • 3rd neutral party decides outcome, which is binding • Mediation: • 3rd neutral party “suggests” outcome, which is not binding

International Perspective“MIGRATING TO AUSTRALIA” • Allowing foreigners to migrate to a country can be politically charged. • Australia seeks immigrants who • Can contribute to the economy. • Will embrace “Australian values”. • Assessment under a point system to see if they are desirable. Examples: • Having skilled occupation (40-60 points). • Working 3 out of past 4 yrs. in 40-60 above occupation (5 more points) • Having a spouse who satisfies basic immigration requirements (5 points) • Fluency in certain languages (5 points) • English language ability (competent = 20 points), (vocational ability = 15 points • Usually immigrants need 120 points to be accepted. • Must read booklet and sign statements agreeing to respect & uphold Australian law and values

Doctrine of Sovereign Immunity • Act of State • Court gives up right of jurisdictionover foreign country or representative • Court will barcompensationbecause the actswere by a foreign government or representative • Sovereign Immunity • Bar to compensationby foreign investors • Immunity to foreign representative or country • One country must respect the independenceof other countries and their representatives • In U.S.: Foreign Sovereign Immunities Act

The International Legal Environment of Business