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Part 1: International Legal EnvironmentsPart 1.1: Transnational Lawyering

1. General Rulesa. No person may engage in the unauthorized practice of lawb. Can apply to lawyers practicing in other jurisdictions than where they

are licensedc. Even if a lawyer is practicing exclusively foreign law, by giving legal

advice he is practicing law in the state for the purposes of the licensing requirements of that state. (In re Roel)

2. Questions to figure out when dealing with foreign lawyers:a. What are the various types of lawyers called and what do those terms

mean?b. What are the structures of the profession as a whole and of the

groupings within that profession that in fact do the legal work?c. What are the rules and practices about entry to the legal profession?d. How many lawyers are there, both in absolute terms and in relation to

the population as a whole?e. What are the rules governing the legal profession?

i. Differ widely based on the jurisdictionii. Even though the privilege varies between the countries, the EU

is still subject to the lawyer-client confidentiality provisions that the member-states have enacted. (AM&S v. Commission)

3. Conflicts of the Law on Lawyersa. Wherever the lawyer is admitted to practice, that jurisdiction has the

disciplinary authority over his or her conduct, regardless of where that conduct occurs.

b. A lawyer not admitted in this jurisdiction is also subject to the disciplinary authority of this jurisdiction if the lawyer provides or offers any legal services in this jurisdiction.

c. A lawyer can be subject to disciplinary authority in more than one jurisdiction. (ABA Model Rule 8.5)

Part 1.2: International LitigationThree basic alternatives for dispute resolution: US courts, foreign courts, and international commercial arbitration

1. Differences between US courts and foreign courts (p. 21-22)2. International Jurisdiction in US Courts

a. Specific jurisdiction (place where cause of action arose) [sometimes]b. General jurisdiction (residence or domicile) [always]c. “Doing business” jurisdiction (defendant’s “constant and systematic”

contacts with the forum) [never]d. Transient jurisdiction (service of process) [never]e. Forum selection clauses are prima facie valid and should be enforced

unless enforcement is shown by the resisting party to be “unreasonable” under the circumstances. (M/S Bremen v. Zapata)

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3. Enforcement of Judgments Internationallya. US ≠ party to any treaty providing for the recognition and

enforcement of foreign judgmentsb. Enforceability of US judgment abroad depends on the local law of the

jurisdiction where enforcement is sought4. Procedural Problems in International Litigation

a. Service of process (Hague Service Convention requires each state to designate a Central Authority to which documents may be forwarded for service in that country)

b. Discovery of evidence (Hague Evidence Convention requires each state to designate a Central Authority to receive letters of request from the judicial authorities of other state-parties)

i. US courts may continue to use FRCP to compel discovery from foreign parties to the litigation or from non-parties abroad who are US citizens or residents

ii. Normally Hague Evidence Convention = only used to gather evidence for use in US courts from foreign non-parties

5. International Arbitration a. Advantages

i. Faster/cheaper/informal (not subject to FRCP)ii. Confidential

iii. Neutral ground for both partiesiv. Multi-lateral treaty re: enforcement of arbitration judgments

(New York Convention)b. Disadvantages

i. Expensiveii. Not always confidential if parties resort to national court

iii. Very difficult to appealc. Arbitration clause should include:

i. Basic agreement to submit to arbitration some or all questions arising under agreement

ii. Agreed-upon place for arbitration to take placeiii. Method for appointing arbitrator(s)

d. New York Convention imposes 2 fundamental obligations (p. 40-41)i. Article II contains obligation to enforce agreements to arbitrate

ii. Article III requires signatories to recognize awards under such agreements and to enforce them by proceedings not substantially more burdensome than those applicable to domestic awards

1. Article V contains narrow list of exceptions to this duty2. Examples: court finds agreement null and void,

inoperative, incapable of being performed, fraud, duress, mistake

iii. To come within scope of Convention, an arbitral award must be made outside the territory of the enforcing state or must not be considered “domestic” by the laws of that state. The

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Convention permits a signatory to limits its application to awards rendered in other signatory countries and to awards to disputes that are considered “commercial”

e. Congress passed Chapter 2 of Federal Arbitration Act to implement the Convention

i. Section 201 provides generally for the enforcement of the Convention

ii. Section 202 limits the Act’s applicability to awards arising out of “commercial relationships” and, in the case of dealings between US citizens, to those arising out of a relationship that “involves property located abroad, envisages property or enforcement abroad, or has some other reasonable relation with one or more foreign states”

iii. Section 203 vests jurisdiction over Convention cases in the federal courts

iv. An antitrust dispute alone does not invalidate a forum selection clause, and the potential complexity of an antitrust claim does not bar arbitration. The parties and arbitral body could retain competent arbitrators, and the dispute would be governed by the national law giving rise to the claim. There is a strong presumption reinforced by the Federal Arbitration Act and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards that favored arbitration for international commerce. (Mitsubishsi v. Soler Chrysler-Plymouth)

v. The Convention allows a court in the country under whose law the arbitration was conducted to apply domestic arbitral law to a motion to set aside or vacate that arbitral award (manifest disregard of the law). (Yusuf v. Toys “R” Us)

Part 2: Introduction to Transnational LawPart 2.1: Transnational Law

1. Definition: “Includes all law which regulates actions or events that transcend national frontiers. Both public and private international law are included, as are other rules which do not wholly fit into such standard categories”

2. International Law: [basically everything below]a. Public International Law

i. International Conventions/Treaties: agreements between 2 or more countries

ii. Customary International Law: general and consistent practice of states followed by them from a sense of legal obligation

1. Charming Betsy presumption: An act of Congress ought never to be construed to violate the law of nations if any other possible construction remains

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2. Congress has authority to supersede a treaty or a rule of customary international law as domestic law

3. “Later-in-time” rule does not apply to state law, treaties prevail over inconsistent state law regardless of timing due to the Supremacy Clause in the Constitution

b. Private International Lawi. When a court can take jurisdiction over a party or property

identified as “foreign”ii. Extent to which the judgment of a court in one country is

entitled to recognition or enforcement in another countryiii. What rules of law are being applied in resolving a transborder

dispute

Part 2.2: Customary International Law1. Two elements

a. “General practice” or the material elementb. “Acceptance as law” or the psychological element

2. Example: expropriation – Restatement (Third) of Foreign Relations Lawa. A state is responsible under international law for injury resulting

from:i. A taking by the state of the property of a national of another

state that1. Is not for a public purpose, or2. Is discriminatory, or3. Is not accompanied by provision for just compensation;

ii. For compensation to be just under this Subsection, it must, in the absence of exceptional circumstances, be in an amount equivalent to the value of the property taken and be paid at the time of taking, or within a reasonable time thereafter with interest from the date of taking, and in a form economically usable by the foreign national.

b. The judicial branch will not examine the validity of a taking of property within its own territory by a foreign sovereign government, extant and recognized by this country at the time of the suit, in the absence of a treaty or other unambiguous agreement regarding controlling legal principles, even if the complaint alleges that the taking violates customary international law. (Banco National v. Sabbatino)

c. General rule: Court abstains from deciding whether act of Cuban government taken within its own borders is valid

d. Congress legislatively overruled Sabbatino with respect to expropriation

e. International law may not be clear on the appropriate level of compensation

i. Custom = general and consistent belief of the states

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ii. The correct amount of compensation that an alien whose property is expropriated should receive is “appropriate compensation.” (Banco National v. Chase)

3. Act of state doctrine is often a bar to bringing expropriation claims in US courts, but there are exceptions

a. Only applies to acts of government within their own bordersb. Doesn’t apply if there is a treaty that provides a clear rulec. May be waived by the executived. May be “commercial activities” exception

Part 2.3: Treaties1. Regular treaties: negotiated and signed by President, ratified by 2/3 of Senate

a. Self-enacting: may create private rights, may be relied on in court without anything more

b. Non-self-executing: do not create private rights on their own, they require implementing legislation to be enacted

c. Generally agreed that travaux préparatoires may be used to interpret treaties where the text leaves one in doubt

d. When the parties to a treaty both agree as to the meaning of a treaty provision, and that interpretation follows from the clear treaty language, we must defer to that interpretation absent extraordinarily strong contrary evidence. (Sumitomo v. Avagliano)

2. Executive Agreement: negotiated and signed by President, but approved by majority of both houses of Congress

Part 2.4: Extraterritoriality1. Extraterritorial regulation: nations wish to regulate conduct by their

nationals abroad or conduct by foreign parties that has effects within their borders

a. Does one state have an authority to apply its laws beyond its borders?b. If yes, how can this be limited (what is the limiting principle)?

2. Modern Customary International Law Rules – Restatement (Third) of Foreign Relations Law§ 402. Basis of Jurisdiction to Prescribe Subject to § 403, a state has jurisdiction to prescribe law with respect to

(1) (a) conduct that, wholly or in substantial part, takes place within its territory; (b) the status of persons, or interests in things, present within its territory;(c) conduct outside its territory that has or is intended to have substantial

effect within its territory;(2) the activities, interests, status or relations of its nationals outside as well as

within its territory; and (3) certain conduct outside its territory by persons not its nationals that is

directed against the security of the state or against a limited class of other state interests.

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§ 403. Limitations on Jurisdiction to Prescribe(a) Even when one of the bases for jurisdiction under § 402 is present, a state

may not exercise jurisdiction to prescribe law with respect to a person or activity having connections with another state when the exercise of such jurisdiction is unreasonable.

(a) Whether exercise of jurisdiction over a person or activity is unreasonable is determined by evaluating all relevant factors, including, where appropriate:

(a) the link of the activity to the territory of the regulating state, i.e., the extent to which the activity takes place within the territory, or has substantial, direct, and foreseeable effect upon or in the territory; (b) the connections, such as nationality, residence, or economic activity, between the regulating state and the person principally responsible for the activity to be regulated, or between that state and those whom the regulation is designed to protect;(c) the character of the activity to be regulated, the importance of regulation to the regulating state, the extent to which other states regulate such activities, and the degree to which the desirability of such regulation is generally accepted.(d) the existence of justified expectations that might be protected or hurt by the regulation;(e) the importance of the regulation to the international political, legal, or economic system; (f) the extent to which the regulation is consistent with the traditions of the international system; (g) the extent to which another state may have an interest in regulating the activity; and (h) the likelihood of conflict with regulation by another state.(a) When it would not be unreasonable for each of two states to exercise

jurisdiction over a person or activity, but the prescriptions by the two states are in conflict, each state has an obligation to evaluate its own as well as the other state's interest in exercising jurisdiction, in light of all the relevant factors, including those set out in Subsection (2); a state should defer to the other state if that state's interest is clearly greater.

3. Presumption Against Extraterritorialitya. Antidiscrimination Law

i. EEOC v. Aramco1. Legislation of Congress, unless a contrary intent

appears, is meant to apply only within the territorial jurisdiction of the United States. Title VII does not extend to US citizens who are outside of the US’s borders.

2. Congress amended Title VII to reverse this decision (p. 106-108)

ii. Mahoney v. RFE/RL1. Congress amended the Age Discrimination in

Employment Act to cover American citizens working for American corporations abroad

2. RFE had to comply with collective bargaining agreement and this law, which was impossible

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3. When an overseas employer’s obligations under foreign law collide with its obligations under the Age Discrimination in Employment Act, the act relieves the employer of liability under the Act.

b. Antitrust Lawi. By mid-20th century, US courts were applying the Sherman Act

extraterritorially on the basis of intended effects in the United States

ii. Hartford v. California: The fact that conduct is lawful in the state in which it took place will not, of itself, bar application of the United States antitrust laws, even where the foreign state has a strong policy to permit or encourage such conduct.

iii. Wood Pulp: EU comparative case (p. 120-122)iv. Empagran: Sherman Act does not apply to claims based on

effects in foreign countries that were independent of harmful domestic effects

Part 2.5: Models for Trade RegulationThree models of the world economy

1. Laissez-faire model: No governmental control or regulation of world trade, apart from the legal and economic infrastructure for a world market that was developed by national governments to facilitate trade by private parties

a. Monetary exchange: some method of exchanging currencyb. Gold standard: commits a nation to allow each holder of a unit of its

currency to exchange it for a stated amount of gold2. National regulation model: Aggressive national efforts to maximize separate

nationals welfares or securitya. Tariffs: placing a price disadvantage on imported goods, meant to

enable domestic producers to compete effectively with foreign producers

b. Quotas: putting flat limits on the amounts of foreign goods that may be imported

c. Currency controls3. International system: power of regulation being conferred on an

international agency

Part 2.6: The International Trade System1. Four important aspects of General Agreement on Tariffs and Trade (GATT)

a. Article I: non-discrimination/most favored nation clause, means that any benefit for one country’s producers must go to all countries

b. Article II: requires countries not to set tariffs higher than the schedules in GATT

c. Article III: national provisions, means that must treat national products the same as imports

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d. Article XI: prohibits NON-tariff restrictions and quotes, idea is that tariffs = transparent, non-tariffs ≠ transparent

2. Uruguay Round (1986-94)a. General Agreement on Trade in Services (GATS)b. Agreement on Trade-Related Investment Measures (TRIMS): forbids

certain rules on investment in a country that prevent the enterprise from importing goods or require it to buy local goods or to export specified amounts of goods

c. Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

d. Formed the World Trade Organization (WTO) to administer GATT and resolve disputes arising under GATT (ex: Shrimp-Turtle Case p. 137)

Part 3: Transnational SalesPossible problems that might arise:

1. The standard commercial law problems treated in the UCC with respect to domestic transactions, complicated by uncertainty as to what law governs the transaction

2. Problems with export control regulations3. Compliance with the tariff, quota, and other rules affecting the product in the

country of destination, including health, safety, and other regulatory requirements not intended as limitations on imports

4. Problems of payment

Part 3.1: Choice of Law & Choice of Forum1. National law = modern law for sales (UCC Article 2)

a. Differences in UCC and Chinese contract law (p. 266-269)b. Examples: non-conformity of goods with contract, standard terms that

limit remedies, expected changes in conditions, battle of the forms2. Private International Law (Conflicts)

a. The court in which the lawsuit is brought would use the conflicts rules of its own jurisdiction to decide what contract law to apply to the dispute

b. In a sale-of-goods case, a US court would look as an initial matter to the conflicts rules in UCC Article 1, § 1-105 limits the parties’ choice of law to one with a “reasonable relation” to the transaction and, in the absence of a choice, creates a bias in favor of applying the UCC so long as the transaction has an “appropriate relation” to the forum (p. 270)

c. In a case not involving the sale of goods, a US court would look to the common-law conflicts rules of the state in which it sits (many states have adopted the Restatement of Conflict on p. 271-272)

3. International Law – United Nations Convention on Contracts for the International Sale of Goods (CISG)

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a. Applies if the parties to the goods contract have their places of business in different countries, each of which has joined the CISG (see fn. 5 p. 272 for list of member countries)

b. Sets forth substantive law rules governing the formation of contracts for the sale of goods between parties whose places of business are in different states and the rights and obligations of those parties

c. In the absence of clear language indicating that both parties intended to opt out of the CISG, choice of law provisions do not preclude the applicability of the CISG

d. Remember that CISG precludes state law (because it’s a treaty) so parties must say “New York law and not CISG”

e. See Filanto v. Chilewich for example of CISG applicationf. Differences in CISG and UCC (p. 273-274)

4. Forms and Drafting in International Salesa. International Chamber of Commerce’s “Incoterms 2000” (p. 276-278)

as a form of commercial shorthand, not law unless they are put into contract

b. Incoterms differ from the UCC definition of those same terms!

Part 3.2: Transportation & Financing in International Trade[see Letters of Credit PowerPoint]

1. Transportation – Bill of ladinga. Receipt showing that the goods have been delivered for shipment and

describing their quantity and conditionb. Carries the right to receive physical delivery of the goodsc. Contract with the carrier and either contains its terms or incorporates

them by reference to another document2. Financing in International Trade

a. Risk that the exchange rate between the two currencies will shift to a party’s disadvantage

i. Buyer may purchase enough of the seller’s currency at the time the contract is made to cover the price when payment is due

ii. Forward exchange contract: typically with a bank, locks in a particular exchange rate

iii. Non-deliverable forward-exchange contract: no physical delivery of the foreign currency, the bank pays or receives an amount reflecting the difference between the agreed exchange rate and the actual exchange rate on the forward date

b. Risk that the buyer will defaulti. Buyer’s government could institute currency controls

ii. Seller may purchase export credit insurancec. Risk that the other party will not perform its contractual obligations

i. Letters of Creditii. See Uniform Customs and Practices for Documentary Credits

(p. 287-290)

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d. Letter of credit is independent of the underlying sale contract, so neither the banks nor the buyer may resist a demand for payment accompanied by conforming documents on the ground that the seller has breached the sales contract

i. Fraud Exception: When the issuer of a letter of credit knows that a document, although correct to form, is in point of fact, false or illegal, he cannot be called upon to recognize such a document as complying with the terms of a letter of credit. (Sztejn v. Henry Schroder)

ii. UCC § 5-109 incorporates this exception (p. 293-294)

Part 3.3: US Regulation of Export Trade[see Export Regulations/FCPA PowerPoint]Three types of regulations affecting exports from the US

1. Export Controlsa. Export Administration Regulations (EAR) require a license from Dept.

of Commerce for the export of certain products and technologiesb. Is the item on the Commerce Control List (CCL)? 10 categories (see

example p.296-298)c. Is the item controlled for a single Reason for Control?

i. If yes, identify that Reason and the relevant Country Chartii. If no, identify the Country Chart for each Reason

d. If “X” in chart, there must be a license/license exemption from Dept. of Commerce

e. Possible reexport problemsf. A state may not ordinarily regulate activities of corporations

organized under the laws of a foreign state on the basis that they are owned or controlled by nationals of the regulating state. (Compagnie Européenne v. Sensor Nederland)

2. Anti-Boycott Legislationa. US rules that prohibit Americans from cooperating with foreign

boycotts, particularly those initiated by Arab states and aimed at Israel (§ 2407 p. 305-306)

b. Effects of legislationi. May not refuse to do business with boycotted country

ii. May not discriminate/furnish informationiii. Applies to foreign companies “controlled in fact” by domestic

concerns (p. 307-308)iv. Limited exception for compliance with local laws

3. Foreign Corrupt Practices Act (FCPA)a. Makes certain types of payments a crimeb. Requires US issuers to maintain reasonable accounting procedures

and internal fiscal controls to prevent such payments from going undetected by auditors

c. Three parallel provisions

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i. § 78dd-1 applies to issuers, both foreign and domestic, who have registered securities with or are required to filed reports to the SEC

ii. § 78dd-2 applies to “domestic concerns” (US citizens, nationals, and residents) and corporations, partnerships, associations, and other entities that have their principal place of business in the US or are organized under US law

iii. § 78dd-3 applies to other persons who act in furtherance of unlawful payments while within the territory of the US

d. Both criminal and civil penalties in suits brought by the DOJ

Part 4: Agency & Distributorship AgreementsPart 4.1: Basic Aspects & Terms

1. Reasons for/against having an agency-distributorship agreementa. Specialized knowledge about a particular market, local

representation/customer serviceb. Will pay for it and lose some profits, will lose some control

2. Why not just set up a subsidiary?a. Scale of business may not be high enoughb. Countries may restrict foreign companiesc. Risk is put back on the companyd. Expensive and time-consuming to set up subsidiary

3. Agency Agreementa. Actual agency v. apparent agency

i. Actual: principal signs agency agreement and binds principal when agent acts

ii. Apparent: no actual agency agreement but principal leads agent to believe that it may act as agent, representations must be made by principal

b. Agent never takes title to the goodsi. No risk of nonpayment to agent (if sales are slow, the principal

suffers)ii. Binds principal

iii. Commission pricediv. Principal retains more control (over price)

4. Distributorship Agreementa. Distributor buys goods from the manufacturer and sells them, does

take title to the goodsi. Risk of nonpayment on distributor (if sales are slow, the

distributor suffers)ii. Does not have authority to bind manufacturer

iii. Mark-up pricediv. Manufacturer retains less control

5. Example distributorship agreement (p. 317-323)

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Part 4.2: Termination1. Questions to ask about agent/distributor protection statute

a. What kinds of representatives are covered by the law?b. What sorts of obligations does the law impose?c. To what extent can the parties vary these obligations by agreement?

2. EU Directive on Laws of Member-States Relating to Self-Employed Commercial Agents (p. 328-331)

a. Creates notice requirements for termination that may not be contracted away (Articles 14-16)

b. Indemnifies/compensates agents, may not be contracted away (Articles 17-19)

c. Application of Directive: It is essential for the Community legal order that a principal established in a non-member country, whose commercial agent carries on his activity within the Community, cannot evade those provisions by the simple expedient of a choice-of-law clause. (Ingmar v. Eaton Leonard)

Part 5: Licensing AgreementsPart 5.1: Basic Terms

1. Reasons for/against having licensing agreement:a. Production in the US and Export: tariffs, transport, manufacturing

costsb. Production in foreign country: expropriation, foreign exchange

difficulties, diversion of executive talentsc. Licensing agreement avoids these risks but creates others (losing

control, creating competitors, losing part of profits)2. IP Survey

a. Patent: products and processes, if US Patent Office grants your patent, you have exclusivity (monopoly but incentive to putting time/effort into new products), territorial (US only), 20 years from date of application

b. Trademark: names or marks identified with particular products, protects customers from confusion/protects goodwill of product and can last forever, don’t have to register but can for additional relief, territorial (US only)

c. Copyrights: author for original expressions in tangible medium, author has exclusive rights to use/perform etc. for author’s life + 70 years, don’t have to register it but can for additional relief

d. Know-How: commercially valuable knowledge, legal protection is limited (must be trade secret/corporate espionage)

3. Example license agreement (p. 355-359)

Part 5.2: Developing Countries1. International Agreements Concerning Intellectual Property

a. Uruguay Round of GATT – TRIPS Agreement, WTO members must

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i. Amend their laws to provide a minimum level of IP protectionii. Ensure that enforcement measures will “permit effective action

against any act of infringement of IP rights” (injunctive relief and damages)

iii. Authorized to apply their laws to prevent adverse effects on competition

iv. Allows for the compulsory licensing of patentsv. Leaves members free to adopt their own rules concerning the

“exhaustion” of IP rightsb. Andean Community Technology Transfer Laws (Bolivia, Chile,

Columbia, Ecuador, & Peru, p. 366-367)i. Licensing agreements must be registered with the competent

national agency in order to be validii. Legislation establishes disfavored clauses:

1. Tying agreements2. Resale price maintenance clause3. Restrictions on supply4. Competitive technologies5. Grant-back clause6. Paying royalties when not actually using patents

c. TRIPS Agreement & Public Healthi. Article 6 – allows members to set their own rules with respect

to the “exhaustion of intellectual property rights,” members decide what constitutes a national emergency or other circumstance of extreme urgency

ii. Article 31 – sets forth the framework for compulsory licensing, Article 31bis amendment to permit exportation for another country’s citizens

Part 5.3: Antitrust[see Antitrust Issues in Distributorships & Licensing Agreements PowerPoint]Tension between IP law and antitrust law

1. DOJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property (p. 373)

a. Generally favorable attitude towards licensing agreements and the restrictions they contain

b. Expressly state that IP owner is not required to create competition in its own technology

2. Licensing Under EU Competition Law – Technology Transfer Block Exemption Regulations (TTBER) (p. 376-383)

a. Applies ONLY to agreements between two parties for the licensing of patents, know-how, and software copyrights

b. Agreements in restraint of trade are prohibited and shall automatically be void

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c. Prohibition may be declared inapplicable if necessary, but agreements between competing parties are treated more strictly than agreements between non-competing parties

d. Hardcore restrictions, entire agreement fails (Article 4)e. Excluded restrictions, provision fails (Article 5)

Part 5.4: Royalties & Gray Market Goods1. Royalties

a. Three common kindsi. Initial royalty

ii. Royalty based on production, sales, or revenueiii. Minimum royalty

b. Exchange rate problemsi. Average exchange rate

ii. Hedging exchange rateiii. Ideal payment is money that happens close to the date of

transactionc. Currency problems: currency controls/political risk insuranced. Taxation problems: whether royalties can be fully deducted from the

licensee’s income as an expense under the law governing the licensee’s taxes

2. Infringing & Gray Market Goodsa. Black market: illegally produced via copyright piracy, patent

infringement, or trademark counterfeitingb. Gray market: legally produced but diverted to unauthorized marketsc. Two statutory provisions protecting trademark owners some

protection against gray market goodsi. Section 42 of Lanham Act: prohibits the importation of

merchandise bearing trademarks that “copy or simulate” a US registered trademark

ii. Section 526 of the Tariff Act of 1930: provides for seizure by Customs officials of “merchandise of foreign manufacture if such merchandise...bear a trademark owned by a citizen of, or by a corporation or association created or organized within, the United States” as well as for damages and injunctive relief against the violator

d. US patent law provides substantial protections, “first sale” doctrine does not apply to sales outside of the US, even sales in the US can be conditioned by restrictions on resale or use

e. EU Directive on Exhaustion of Trademark Rights (p. 389-391)

Part 6: Foreign Direct InvestmentPart 6.1: The Multinational Enterprise

1. Definition of MNE

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a. Not a single entity, but a structure made up of many entities, each organized under the laws of some nation and tied together by links of stock ownership or other contractual agreements

b. Entities are creatures of national and not international lawc. Entities that comprise MNE tend to coordinate their operations in

response to a common management strategy, which will generally be designed to maximize profits

d. MNEs enjoy greater flexibility in organization than “uninational” enterprises

2. Hero or Villain?a. Hero

i. Creation of jobsii. Inflow of new capital

iii. Bring new technology to host countryiv. Build infrastructure around their facilitiesv. Spur domestic firms into greater efficiency by exposing them

to new competitionb. Villain

i. “Race to the bottom” in that countries will lower labor/environmental regulations to attract MNEs

ii. MNEs don’t really transfer technology or benefit the host country (they include restrictive covenants, non-competition, and confidentiality restrictions in the agreements)

iii. MNEs can drive out the local competitioniv. Cultural problems/clash with governmental officials

3. OECD Guidelines for Multinational Enterprises (p. 199-205)a. Companies will follow hard law and not stress too much about these

voluntary guidelinesb. But bad publicity can result from not following these guidelines

4. How to litigate against businessesa. Alien Tort Statute: gives the district courts jurisdiction over “any civil

action by an alien for a tort only, committed in violation of the law of nations or of a treaty of the United States,” Supreme Court ruled that these suits could go forward so long as the claims allege a violation of international norms and sufficiently established law

b. Alien Tort Claims Act: used by victims of serious human rights abusesi. Not every case “touching foreign relations” is nonjusticiable,

and judges should not reflexively invoke these doctrines to avoid difficult and somewhat sensitive decisions in the context of human rights. The preferable approach is to weigh carefully the relevant considerations on a case-by-case basis. (Khulumani v. Barclay)

ii. Second Circuit has since held that corporations cannot be liable for aiding and abetting at all because under international law there was no such thing as aiding and abetting for corporations but only for individuals, and since ATS only applies for

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violations of international law then there is no cognizable cause of action (Kiobel v. Royal Dutch Petroleum)

5. Nationality of Corporationsa. Important for several reasons

i. Rights and duties of a corporation’s directors, managers, and shareholders are determined by the law of its domicile (“internal affairs” rule)

ii. Rights of a corporation under international law may depend upon its nationality (whether it is entitled to claim rights under a treaty)

iii. Corporation may incur obligations under national law by reason of its nationality (ex: corporations organized under US law are subject to US taxation on their worldwide income, but foreign corporations are only subject to US taxation on their US source income)

iv. Restrictions on a corporation’s activity may be imposed by reason of its foreign nationality

b. Courts have looked almost exclusively to the state of incorporation or to the place of management, but several other factors have been found pertinent or conclusive (see list p. 166)

c. EC Treaty – Right to Establishment: Where it is the practice of a Member State, in certain circumstances, to refuse to register a branch of a company having its registered office in another Member State, the result is that companies formed in accordance with the law of that other Member State are prevented from exercising the freedom of establishment conferred on them by Article 52 and 58 of the Treaty. (Centros v. Erhvervs-og)

Part 6.2: Tax Issues[see Tax Issues PowerPoint]

1. The International Tax Environmenta. Tax considerations can make or break a deal and will have a major

effect on the way in which a transaction is structuredb. Tax planning is especially keen when crossing international

boundaries (the same gains may be subjected to tax by two treasuries)

c. Complex system of tax treaties in place2. The Basic Principles: Status and Source

a. Status of the Taxpayer & Source of the Incomeb. Global v. schedular systems

i. Global: draws relatively few distinctions among different kinds of income and tends to subject all income to taxation at the same rate, stress the status of the taxpayer as the key to tax

ii. Schedular: draws many distinctions, more apt to differentiate between foreign and domestic income

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c. General rule in the USi. US citizens, resident aliens, and domestic corporations

(organized within the US) are subject to taxation on their global income

ii. Non-resident aliens and foreign corporations (not organized within the US) are subject to taxation only on their US source income

3. Abuses of the Status and Source Principles and Legislative Reactions to thema. Transfer Pricing: Domestic corporation involved with its foreign

subsidiaries in an integrated international venture that would attempt to shift as much of the income derived from that venture as possible to its foreign subsidiaries, thereby insulating that income from immediate domestic taxation

i. See list of possible solutions p. 239ii. IRS has established advance pricing agreements in which

companies present their pricing agreements for prior IRS approval and can rely on its being respected for a period of 3-5 years if applied consistently

iii. Problems with inconsistent state taxing has led to the use of single formula

b. Controlled Foreign Corporations: Domestic corporation establishes foreign corporation to conduct its manufacturing and selling operations to own and manage its foreign securities, thereby eliminating all United States taxation for foreign earnings until dividend payments or liquidation

i. Neutrality problems: “deferral” rules departed from an asserted norm of neutrality between the tax treatment of domestic and foreign investment by United States shareholders

ii. Equity problems: Unfair to provide more advantageous rules for American investing abroad

iii. See p. 242-245 for more CFC information4. Accommodation Among National Tax Systems: Unilateral and Bilateral

Techniques – Foreign Tax Credita. Application of the tax laws of one nation to persons or transactions

linked with other nations often leads to problems of overlapping or foreign “double” taxation

i. Credit approach: permit the taxpayer to either credit against the taxes owed on its global incomes taxes paid to a foreign country or to deduct such foreign taxes from its taxable income

ii. Exemption approach: Exempt from domestic taxation entirely some or all classes of foreign-source income

b. Tax credit = US tax before credit x foreign income/total incomec. Taxpayers may separate according to types of income, which has the

effect of limiting the ability of the taxpayer to offset income that is

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highly taxed by including it with income that bears little taxation (passive income v. other income)

d. Policy Issues under FTCi. General effect of FTC: American taxpayer is subject to a total

income tax burden at the higher of the United States or the foreign rate

ii. FTC has special implications for the United States’ policy of assisting less developed countries through its effect upon the flow of American private investment to such countries

iii. FTC is limited to “income” and closely allied to taxes (foreign levy is a tax only if it requires a compulsory payment to the government)

iv. Even when the foreign tax is clearly an income tax, differences in the way in which it is applied add complications to the application of the US tax credit and significantly curtail its advantages for an American taxpayer

v. Controversy has long surrounded the grant of a credit for amounts paid to a foreign government in connection with the production of oil

5. Tax Treatiesa. US is party to 58 income tax treaties covering 66 countries as of 2007b. Nearly every country in Europe, major countries in Asia, South Africa,

Mexico and Venezuelac. Tailored to the specific relationship between two countries

Part 6.3: Limited Liability1. Generally, shareholders are not responsible for the debts of a corporation,

and their liability for the corporation’s activities is therefore “limited” to the amounts of their investment in the corporation

2. However, this limited liability is not absolute, but the tests used to pierce the corporate veil are often vague and indeterminate

a. When the owners treat the assets of the corporation as their own and add or withdraw capital from the corporation at will

b. When they hold themselves out as being personally liable for the debts of the corporation

c. When they provide inadequate capitalization and actively participate in the conduct of corporate affairs

3. See Bhopal/UCI example p. 194-1974. Foreign Direct Investment: investment by an enterprise from one country in

an enterprise from another, involving a long-term relationship and a significant degree of control by the foreign investor

a. FDI v. Licensing Agreement Benefitsi. FDI allows for more control over IP and quality of the product

ii. May also be able to earn a greater returnb. FDI v. Licensing Agreement Burdens

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i. Company must acquire knowledge of local markets and conditions necessary to make its foreign investment successful

ii. Variety of regulatory risks (exchange controls, nationalization or expropriation)

5. Choice of Corporate Form – Branch v. Subsidiarya. Tax considerations (subsidiaries allow the parent company to “defer”

paying taxes to the parent company’s home country until the profits are repatriated as dividends, but company may deduct losses of foreign branch to reduce its taxable income but not the losses of a foreign subsidiary)

b. “Limited liability” of subsidiaries (company would be responsible for debts and other liabilities of a foreign branch, but subsidiary is on its own and generally may not look to the parent for payment, liability is “limited” to the amount of capital that the parent has invested in the subsidiary)

c. See p. 396-397 for Mexican corporations law

Part 6.4: Restrictions on Foreign Investment1. Foreign Investment in Mexico (see Mexican Foreign Investment Act of 1993

p. 399-408)2. Specific Restrictions upon a Foreign Corporation’s Right to do Business

a. US places certain limits on the activities of corporations that are considered “foreign” under various criteria

i. Licenses for facilities that produce or use nuclear materials, US domestic airlines, US flag merchant shipping

ii. The rules concerning foreign ownership of US broadcasters can be overcome by investigating the public interest served by the decision. (In re Application of Fox)

Part 6.5: Protection of Foreign Investment1. Bilateral Investment Treaties (BITs): focused exclusively on investment and

mostly entered into with developed countries2. North American Free Trade Agreement (NAFTA) modeled on BIT, between

Canada/USA./Mexicoa. Chapter 11 – Protection of Foreign Investment

i. See list of NAFTA Articles and Exceptions p. 410-414ii. Article 1110: Expropriations and Compensation

iii. Procedure for dispute resolution = Chapter 11 tribunalsiv. Chapter 11 awards are enforceable under the New York

Convention, but provided the claimant has not chosen to proceed under the ICSID Convention, the losing party may seek to have the award set aside by the courts of the country in which the arbitration took place

b. Metalclad’s investment was not accorded fair and equitable treatment in accordance with international law, and Mexico violated NAFTA

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Article 1105(1). An underlying objective of NAFTA is to promote and increase cross-border investment opportunities and ensure the successful implementation of investment initiatives. Mexico failed to ensure a transparent and predictable framework for Metalclad’s business planning and investment. Mexico must also be held to have taken a measure tantamount to expropriation in violation of NAFTA Article 1110(1). (Metalclad v. United Mexican States)

c. The Tribunal must not make decisions beyond the scope of the submission to arbitration by deciding upon matters outside of Chapter 11. (United Mexican States v. Metalclad)

3. Political Risk Insurancea. Overseas Private Investment Corporation (OPIC), US government

agency, sells insurance to cover three kinds of political risk: expropriation, political violence, and currency instability

i. Available only to US citizens, corporations organized under US law and more than 50% owned by US citizens and foreign corporations at least 95% owned by US citizens, and only to insure investments with countries that have signed an investment guarantee with the United States (~150 countries)

ii. Covers up to 90% of the book value of an investment, premiums are relatively high (1.5% to cover all three kinds of political risk)

b. Multilateral Investment Guarantee Agency (MIGA), covers all three risks covered by OPIC plus breach of contract by a host government

Part 7: Mergers & AcquisitionsPart 7.1: Corporate & Securities Law

1. Mergers and acquisitions = alternative to establishing a new brand or subsidiary abroad

a. More important vehicle in developed countriesb. Advantages: speed, already-existing distribution network/goodwill

with local customers, more efficient2. Securities Aspects of Transnational Acquisitions

a. Sale of stock implicates US or foreign laws regulating the sales of securities

b. Rule 10b-5 – It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,(a) To employ any device, scheme, or artifice to defraud,(b) To make any untrue statement of a material fact or to omit to state

a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

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in connection with the purchase or sale of any security.c. Application of Rule 10b-5 to a transnational sale/purchase raises

jurisdictional questions like those raised by the extraterritorial application of the Sherman Act

i. §10(b) of the Securities Exchange Act of 1934 applies only to purchase and sales of securities in the United States transactions (transactions in securities listed on domestic exchanges, and domestic transactions in other securities). The “conduct and effects” tests are relevant only if the presumption against extraterritoriality are overcome. (Morrison v. National Australia Bank)

ii. Overruled: The nation where the conduct has occurred has jurisdiction to displace foreign law and to direct the courts to apply its own. (Leasco v. Maxwell)

d. Tender Offers & Takeover Defensesi. Williams Act regulates the making of public tender offers

1. Requires the party making the offer to give the offerees elaborately specified information that would be useful to them in deciding whether or not to sell

2. Tender offer must be held open for 20 business days, and if bidder changes its bid the offer must remain open for 10 additional days

3. Requires that all offerees be treated equally during the course of the operation

4. Does NOT contain any mandatory bid provision requiring a bidder who gains control to buy out the remaining shareholders at a reasonable price

5. Contains antifraud provision similar to Rule 10b-5ii. Takeover Defenses: defensive actions taken by the target

company in response to a hostile takeover offer designed to thwart the bid

1. Matter of state corporations law2. See p. 459 for list of common defenses

iii. See p. 460-462 for EU Takeover laws

Part 7.2: Antitrust Law1. US Antitrust Law with Respect to Mergers

a. Clayton Act (1914) prohibits any person engaged in commerce from acquiring the stock of assets of another person engaged in commerce where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly”

b. Hart Scott-Rodino Act (1976) requires pre-merger notification for large acquisitions to DOJ or FTC if, as a result of the acquisition, the acquiring person would

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i. Hold more than $200 million of the acquired person’s voting securities and/or assets; or

ii. Hold more than $50 million of the acquired person’s voting securities and/or assets, if the acquiring person has assets or annual sales of $100 million or more and the acquired person has assets or annual sales of $10 million or more, or if the acquiring person has assets or annual sales of $10 million or more and the acquired person has assets or annual sales of $100 million or more

iii. Adjusted for inflation annually since 2004iv. Waiting period of 30 days after filing the notification, DOJ/FTC

may require additional information and may extend the waiting period

v. If after review, the DOJ/FTC concludes that the acquisition would violate the Clayton Act, it may bring suit in federal court to enjoin in the acquisition

c. Hart-Scott-Rodino applies equally to acquisitions involving foreign parties that affect US commerce, but DOJ/FTC have authority to exempt transactions that are not likely to violate US antitrust laws and they have exercised that authority to exempt some transactions involving foreign parties (see §802.51 p. 470-472)

2. EU Merger Regulationa. EC adopted regulation requiring pre-merger notification to the

Commission in 1989, EC replaced this regulation in 2004 with a new merger regulation (Council Regulation 139/2004 p. 473-480)

b. Changes the substantive standard of review (prohibits mergers that “significantly impede effective competition in particular as a result of the creation or strengthening of a dominant position”)

c. Allows parties to file a notification before entering a binding agreement so long as they can demonstrate a good faith intention to conclude such an agreement

d. Changes the timetable for review (see p. 472-473 for details)e. Allows the parties to a transaction that is not covered by the

regulation but is subject to notification in three or more member states to request review by the Commission instead, so long as none of these member state object

3. Example: Boeing/McDonnell Douglas Merger (p. 482-488)a. The Boeing Company’s proposed acquisition of McDonnell Douglas

Corporation would not substantially lessen competition or tend to create a monopoly in either defense or commercial aircraft markets. (In the Matter of The Boeing Company/McDonnell Douglas Corporation)

b. This proposed merger would lead to the strengthening of a dominant position through which effective competition would be significantly impeded in the common market within the meaning of Article 2(3) of the Merger Resolution. (Commission Decision declaring a

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concentration compatible with the common market and the functioning of the EEA Agreement (Boeing/McDonnell Douglas))

c. Differences between US Hart-Scott-Rodino Act and EU Merger Regulation

i. Transaction might have different effects within each jurisdiction

ii. Differences in the substantive laws to be applied1. Clayton Act prohibits acquisitions whose effect “may be

to substantially lessen competition, or to tend to create a monopoly”

2. Merger Regulation focused on whether a transaction would create or strengthen a “dominant position,” 2004 Merger Regulation focuses on “significantly impede effective competition in particular as a result of the creation or strengthening of a dominant position”)

iii. Procedural differences1. Merger Regulation permits third parties, including

competitors, to submit comments to the Commission if they can show a sufficient interest in the outcome of the transaction

2. Commission also has the authority to block a transaction by itself, subject to appeal to the CFI/ECJ

3. DOJ/FTC must seek an injunction in federal court to block a transaction if the parties do not

d. US/EU Coordination Efforts i. Agreement Regarding the Application of Their Competition

Laws (1991): Authorities must notify each other whenever the enforcement activities of one affect the other, to coordinate their enforcement activities, to take into account each other’s interests, and to consult with each other upon request

ii. Agreement on the Application of Positive Comity Principles in the Enforcement of Their Competition Laws (1998): permits one party to request that the other party take enforcement action against anticompetitive activities occurring in the other party’s territory that adversely affect the first party

iii. Joint working group that has issued a set of “best practices” for cooperation in merger investigations, with provisions for coordinating the timing of merger investigations and sharing information and analysis

Part 7.3: Exon-Florio & Privatization1. Exon-Florio: Gives the President of the United States authority to suspend or

prohibit any transaction that could result from foreign control of any person engaged in commerce in the United States if he finds that “there is credible

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evidence...that the foreign interest exercising control might take action that threatens to impair the national security”

a. See factors to be considered p. 490-491b. President is delegated the authority to review acquisitions under

Exon-Florio to an inter-agency committee called the Committee on Foreign Investment in the United States (CFIUS)

c. CFIUS receives notices of foreign acquisitions from the parties involved, after which it has 30 days to decide whether to initiate an investigation, 45 days to complete investigation and make recommendation to President, who then has 15 days to decide whether to block the transaction or allow it to proceed

d. Giving notice under Exon-Florio is voluntary, but the parties to a transaction raising national security concerns have an incentive to do so and gain approval because the President can order divestiture of unapproved transactions

e. Increase in “mitigation” agreements negotiated by CFIUS2. Privatization

a. Special kind of acquisition that involves the takeover of a state-owned company

b. Governments may want to privatize state-owned enterprises for many reasons (ideology, budgetary concerns, desire to improve performance)

c. Positive impacts on a government’s budget in 3 waysi. Proceeds from privatization provide revenues that a

government may use to cover shortfalls in its budget or to reduce its debts

ii. If the state-owned enterprise has been losing money, privatization will end the need for subsidies and the consequent drain on public resources

iii. Once the privatized company begins to show a profit, the government can expect still more revenue in the form of taxes

d. Special difficulties for the foreign investor in acquiring state-owned companies

i. Transaction is more likely to be politically charged than the acquisition of a privately owned company

ii. Privatizations are more likely to face opposition from employees and their representatives, who feel like their jobs at the state-owned enterprise were relatively secure and fear that privatization will mean layoffs

iii. Little or no existing regulatory framework to govern the privatized company

iv. State-owned firm may have less information about its own assets and liabilities than a private firm would because there is less of an incentive to keep good accounts when earning a profit is not a priority and when the strap will make up any losses that develop

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v. If the state-owned enterprise had previously been nationalized, there may be issues related to the claims of its former owners and their heirs

e. See Venezuela example p. 495-496

Part 8: Joint VenturesPart 8.1: International Joint Ventures: US-Chinese Joint Venture Contract

1. Joint Ventures: Common projects between independent parties, usually companies, that share both management responsibilities and the financial risks

a. Equity: Parties establish another corporation in which they both own interests

b. Contractual: Parties do not establish another corporation but simply specify their rights and obligations by contract, constituting in effect a partnership

2. Two principal reasons why firms agree to do share controla. Government regulation may require foreign investment to take the

form of a joint venture either generally or in particular areas of the economy

b. Even when not required by law, two companies may choose to enter a joint venture because alone neither has all of the ingredients necessary to make the venture succeed

i. Local partners may have familiarity with local conditions, including government regulations and the bureaucracy that administers them, local product markets, channels for distribution, labor conditions, and local customs, might also bring existing production and distribution facilities and an established reputation

ii. Foreign partner is expected to contribute its technology, management skills, financing, and perhaps access to markets for export

3. Issues of particular importance in negotiating joint venturesa. Control

i. Will the foreign and local partner each own 50% in an equity joint venture or will there by a majority and minority partner?

ii. If there is to be a majority partner, will its interests be protected by requiring a supermajority or unanimity for certain decisions?

iii. How will responsibilities be divided between the board of directors and the joint venture’s managers, and how will the latter be selected?

b. Technology transfer: i. What technology will the foreign partner license to the joint

venture?

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ii. How will their use be restricted to protect the foreign partner’s intellectual property rights?

iii. Who will own the new technologies or improvements developed by the joint venture?

c. Valuationi. What assets are each party bringing to the joint venture (IP

rights, an existing distribution network)?ii. How is each party’s distribution to be valued?

d. Dispute resolutioni. What will happen if differences =develop over the life of the

joint venture and cannot be resolved over negotiation? ii. Should they be submitted to arbitration or taken to court?

e. Exiti. How may a party leave the joint venture?

ii. May it sell its interest to a third party?iii. If so, should the other partner be given a right of first refusal?iv. May the joint venture continue to use technology from the

foreign partner after it leaves the joint venture?f. Taxes

i. Joint venture may elect to be treated either as a corporation or as a partnership under the IRS’s check-the-box regulations

ii. In the past, China provided tax incentives to foreign-invested enterprises, including joint ventures and wholly owned foreign enterprises (now there is a flat rate of 25%)

Part 8.2: Chinese Regulation of Foreign Investment1. Steps of Establishment of Joint Venture

a. Identification of appropriate joint venture partnerb. Preliminary negotiations, parties may sign non-binding letter of intent

or memorandum of understandingc. Prepare a preliminary feasibility study, which Chinese partner will

submit to government department that will supervise the joint venture

d. Negotiate “joint venture agreement” which sets forth the main points of their agreement and more detailed “joint venture contract,” which sets forth their rights and obligations

e. Submit all documents for approval, government authorities have three months to approve/disapprove

2. See Sample Joint Venture Contract p. 499-504)3. Chinese Law

a. Foreign company may engage in limited activities without creating a separate legal entity by establishing a representative office to facilitate contacts with businesses in China

b. Foreign companies are also allowed to establish wholly-owned subsidiaries known as wholly-formed enterprises

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c. Historically, joint ventures have been the Chinese government’s preferred form of foreign investment and they remain popular today

d. See Law on Sino-Foreign Equity Joint Ventures p. 505-510

Part 8.3: Resolving Differences1. Possible Differences and Tensions for Joint Ventures

a. Technologyi. Local partner will want the most advanced technology for the

joint venture, foreign partner may be content to use technology that might be regarded as outmoded back home but seems adequate for local circumstances

ii. Foreign partner may wish to place restrictions on the use of its technology to safeguard its IP rights, local partner may resist these restrictions or simply ignore them, using the technology to improve its own products which then compete with the joint venture’s

iii. Local partner may come to resent the continuing payment of royalties to the foreign partner once the technology has been learned and has come to seem rather obvious

iv. Who owns improvements made by joint venture, local partner will tend to see these as the property of the joint venture, while the foreign partner will tend to see them as part and parcel of its own technology

b. Procurementi. Preferences about the firms from which goods and services are

purchasedii. Less developed countries may have a tendency for companies

to make purchases from related or “friendly” firms, which the foreign partner may view with suspicion

iii. If the joint venture purchases materials from the foreign partner, joint venture may resist any attempt by the joint venture to redirect purchases even if other sources of supply become cheaper

c. Personneli. Foreign partner will be skeptical of presence of family

members and friends in the management of the joint ventureii. Foreign partner may also be troubled to find that the local

personnel it has trained are often transferred to the local partner’s own operation

iii. Local partner may resent the rotation of managers from the foreign partner, who brings with them a certain arrogance and seem to leave just when they start to understand something about local conditions

d. Expansion

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i. Local partner – sometimes under local government pressure – may wish to export to foreign markets, which may trouble the foreign partner which may be supplying those markets either through its own manufacturing or through licensees

ii. Roles may be reversed as to local markets, with the foreign partner wishing to expand into other product lines and the local partner being constrained by ties of family, school, or guild loyalties from entering into competition with other local firms

iii. Expansion may also require additional infusions of capital, which the local partner may have more difficulty providing

e. Dividends & Investment Policyi. Local partner will want a higher percentage of the joint

venture’s profits paid out in dividends while the foreign partner may prefer to reinvest the profits in the joint venture

ii. Greater size of the foreign partner may give it a longer profit horizon, and it may see advantages in deferring the payment of its home country’s taxes

iii. Local partner may feel pressure from its government to show a return more quickly (in a country with considerable political tensions the roles may reverse)

iv. Foreign partner will see opportunities at home or in third countries that promise as good a rate of return with less risk, while the local partner will be under pressure from the government not to let funds go abroad and will be insured to local risks

f. Culturei. Cultural differences may be magnified in a relationship in

which one party is expected to provide the technology and management expertise

ii. Tendency for foreign managers to view their local partners as lazy and resistant to change and for local managers to view their local counterparts as arrogant and condescending

2. Dispute Resolution in US-Chinese Joint Ventures – See p. 513-518i. CIETAC arbitration is obviously governed by CIETAC

arbitration rules, which may differ from the arbitration rules of other institutions

ii. CIETAC’s rules provide that the arbitral panel may conciliate a dispute submitted to it if both parties agree

iii. Enforcement of CIETAC awards in China is not governed by the New York Convention because such awards are not made in the territory of a State other than China

Part 9: Concession AgreementsPart 9.1: Drafting Problems

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1. Classic Concession Agreements: generally did not obligate investors to explore or drill for oil, did not allow host states to participate in the ventures, and provided compensation only through royalties

2. Currently seen as a semi-public agreement made between a State and a private individual, whose object covers a public utility or the exploitation of certain natural resources, and in which are defined the rights and obligations of the parties in their mutual relationship

a. Contracting parties are not ordinary private persons, one is the State or a Government organ, the other very commonly being a foreign corporation

b. Object of contract is usually a long-term exploitation of natural resources, involving expensive plants and installations

c. Concession deeds follow generally a standard legal form, in which usually are provided special clauses concerning technical and financial provisions, use of exorbitant rights and privileges, the choice of the proper law of the contract, a compulsory arbitration clause

3. Controla. Concession agreement tends to give much power to the foreign party

since it generally carries ownership rights along with itb. Service or operating agreement would tend to downgrade the role of

the foreigner to that of a mere agentc. Possible to readjust the situation so as to minimize the control given a

concessionaire and maximize that given an operatord. State without technological resources will have to leave the running of

the project to the foreign party whatever the agreement’s designation4. Share of Revenue Attributed to Each Party

a. Size of the shareb. Character of the state’s sharec. Specify how the profit is to be measured

5. Extent of Enterprise’s Involvement in Development Outside of Production6. Changes in the Long-Term of the Agreement7. See Abu Dhabi Oil Concession Agreement p. 532-549

Part 9.2: Legal Aspects1. Problems because Government is Contracting Party and Lawmaker

a. Enact environmental or safety laws that impose additional burdens on the foreign investor

b. May change the tax rates applicable to corporations generally or to the foreign operation in particular

c. May even change the law of contract rules that govern the agreementd. Need for governmental party to preserve sufficient flexibility to enact

laws that it considers to be in the general interest, without incurring excessive liabilities

2. Choice of Dispute Resolution Mechanisms

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a. Very rare for the domestic courts of foreign investor’s home state to be chosen, this is an insult to the host state

b. Relatively common for concession agreements to select the courts of the host state

i. BITs make the choice of the host state’s courts may seem less dangerous

ii. Relatively consistent line of authority holding that such clauses, even if exclusive, do not deprive international arbitral tribunals of authority to decide BIT claims

c. International arbitrationi. Neutrality this offers may be viewed by the foreign investor as

an advantage over the domestic courts of the host stateii. Parties may choose to create their own arbitral procedure ad

hociii. Parties may refer to an existing set of rules or to an existing

arbitral institution (UNCITRAL arbitration rules)iv. Parties may choose one of the institutions widely used for

international commercial arbitrationv. International Centre for Settlement of Investment Disputes

(ICSID) was created specifically to hear cases between states and private investors

1. Both the host state and the foreign investor’s home state must be parties to ICSID Convention

2. Awards under ICSID Convention are not subject to review by domestic courts under framework generally established by the New York Convention

3. Choice of Law Possibilitiesa. No choice of law: most legal systems would look to the law of the host

state, since it is most closely connected with the contractb. Law of the contract: concession agreement constitutes a self-

contained system within which the concessionaire and the government operate, certain theoretical problems

c. Law of a single state: extremely rare to find an agreement with a government that is governed by the law of the foreign investor’s home state

d. Principles of law common to the parties’ states: select those principles of law common to the host state and the investor’s home state, since such principles cannot obviously be changed by the host state alone

e. General principles of law: advantage of not being subject to change by host state, but multiplies the comparative law difficulties

f. International law: it does not necessarily follow that the choice of international law to govern the contract raises the contract itself to the level of a treaty

4. Stabilization Clausesa. Meant to limit, prevent, or compensate for changes in the regulatory

regime that may harm the foreign investor

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b. May be expressed either as a prohibition or a choicec. Modern agreements frequently provide for a rebalancing of the

parties’ rights and obligations in the event of a legislative change in order to reestablish the initial equilibrium of the agreement

d. Does not have to freeze all laws applicable to a foreign investor, perhaps only those most important to the financial success of the investment

Part 9.3: Breach or Repudiation1. Customary International Law

a. Taking away or destruction of rights transmitted, acquired, and defined in a contract is as much a wrong entitling the sufferer to redress, as the taking away or destruction of tangible property

b. A state’s breach of an ordinary commercial agreement does not give rise to international responsibility

c. See Restatement (Third) of Foreign Relations Law § 712 p. 561-5622. Bilateral Investment Treaties

a. Frequently contain a provision for “fair and equitable treatment,” which recent arbitral awards have construed to protect investors’ reasonable expectations, expectations that may be created by the terms of a contract

b. May contain “umbrella clauses,” in which the state-parties agree to observe other obligations they have entered into with respect to investments

c. May contain dispute clauses that allow an arbitral tribunal to hear not just claims that the BIT has been violated but other claims relating to the investment

Part 9.4: Renegotiation1. Tension between need for contractual stability and need to adjust to changes

circumstances2. Bargaining often occurs in the shadow of threats from each side

a. Host state may threaten to expropriate the investment entirely if the agreement cannot be renegotiated to its satisfaction (with serious costs)

i. Government may be less competent to run the operation than the foreign investor

ii. Expropriation may affect the host country’s reputation as a safe place to invest

iii. Foreign investor may bring and perhaps win an expropriation claim against the host state

b. Foreign investors may threaten to pull out, leaving the host state to its own devices or to bring an arbitral claim if the investment is expropriated or unilaterally modified

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Part 10: International LendingPart 10.1: Drafting International Debt Instruments

1. Two principal instruments through which sovereign states issue debta. Syndicated bank loans: terms are set forth in a loan agreement

negotiated with a lead bank or banksb. Bonds: securities sold to and traded among a broader market of

investorsi. In U.S. must do two things

1. File a registration statement with the SEC2. Furnish to each purchaser (after registration statement

is declared effective by the SEC) a part of the statement called the prospectus that contains the data the purchaser supposedly needs to know to appraise the value of the securities

ii. Forms of bonds1. Bearer: entitles whoever physically holds the bonds to

receive principal and interest payments by presenting “coupons” attached to the bonds to the paying agent

2. Registered: paying agent maintains a register of bondholders and makes payments to whoever is listed as the owner on the record date

3. Certificated/book-entry: receive a form of the bonds themselves/registered in the name of a company that acts as a depository

c. See Mexican Notes p. 574-585 and explanation p. 587-5892. Terms and Conditions

a. Clauses providing when, where, and in what currency the funds are to be advanced to the debtor

b. Terms on which the debtor is to repay what it owesc. Interest rate

i. Fixed: important to limit the options for early repayment and redemption

ii. Floating: calculated based on an underlying rate plus a “margin”

iii. Possible legal limits on the amount of interest that may be charged or that it is unlawful to charge the borrower a higher rate of interest after a default

Part 10.2: Enforceability1. If a country cannot or will not pay, can its obligation be enforced in a court of

law?a. Defense: non-enforcement of the loans is consistent with US policyb. The act-of-state doctrine is applicable to a dispute only if, when the

decrees were promulgated, the situs of the debts was in the country promulgating the decrees. (Allied Bank v. Banco Credito)

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2. Foreign Sovereign Immunitya. Restrictive theory: foreign states may enjoy immunity from claims

arising out of governmental activities but were not immune from claims arising out of its non-governmental activities

b. Foreign Sovereign Immunities Act of 1976 (FSIA): Supreme Court has held that this is the sole basis for obtaining jurisdiction over a foreign state

c. “Foreign state”: political subdivisions as well as any “agency or instrumentality”, includes corporations “a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof”

d. See §1605 exceptions from immunity p. 595-596e. Under FSIA, if a foreign government engages in “commercial activity”

that has a “direct effect” in the United States, then that government is subject to jurisdiction in the United States. (Argentina v. Weltover)

Part 10.3: Restructuring Sovereign Debt1. Paris Club

a. Forum through which creditor countries negotiate to restructure their bilateral loans to debtor countries

b. 19 permanent members, began in 1956, housed in French Treasury, has set of rules and principles to guide it

c. Insists on “comparability of treatment,” specifically that a sovereign debtor may not offer its private creditors more favorable terms than those agreed to by the Paris Club

d. Deals are concluded more quickly than those with private creditors2. London Club

a. Forum for restructuring of commercial bank loansb. Began in 1970s, typical practice is to organize a Bank Advisory

Committee of the 12 to 15 banks with the largest exposure to negotiate an agreement in principle with the sovereign debtor

c. Bondholders are offered opportunity to exchange their existing bonds for new bonds that may differ in maturity, principal amount, interest rate, or some combination of the three

3. International Monetary Fund (IMF)a. Three important roles

i. Serves as “honest broker” among lenders encouraging restructuring and arranging new lending from private and official sources

ii. Extends credit to countries in financial crisis, permits lending into arrears if restructuring negotiations had begun and had a reasonable likelihood of success, if debtor is making “good faith efforts” to reach an agreement with creditors

iii. Provides a good housekeeping seal of approval for the economic policies of developing countries

IBT Outline Page 34

b. Criticismi. Possibility of bailout from IMF creates a “moral hazard” for

both debtors and creditors, situation where people are encouraged to engage in risky behavior because they are protected from its consequences

ii. Economic reforms required under IMF’s policy of “conditionality,” too harsh an impact on the people of developing countries and makes developing countries more exposed to international financial crises

4. International comity is only appropriate when the actions are consistent with United States government policy. (Pravin Banker Associates v. Banco Popular)

5. International Bankruptcy (see p. 608-611)6. Collective Action Clauses (see p. 610-612)