T H E I N T E R N AT I O N A L L AW Y E R A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SPRING 2011 • VOLUME 45 • NUMBER 1 INTERNATIONAL LEGAL DEVELOPMENTS IN REVIEW: 2010 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William B.T. Mock, Jr. Mark E. Wojcik Business Regulation Customs Law Export Controls and Economic Sanctions International Antitrust International M&A and Joint Ventures International Trade Disputes International International International International International International Industries Aerospace and Defense Industries International Energy and Natural Resources International Transportation Tax, Estate, and Individuals Immigration and Naturalization Law Arbitration Commercial Mediation Courts Criminal Law Family Law Litigation Corporate Corporate Social Responsibility International Commercial Transactions International Intellectual Property Law Finance International Financial Products and Services International Secured Transactions and Insolvency International Securities and Capital Markets Islamic Finance Public International Law Anti-Corruption Anti-Money Laundering Human Rights International Art and Cultural Heritage International Environmental Law National Security Regional and Comparative Africa Asia/Pacific Canada China Europe India Latin America and Caribbean Mexico Middle East Ukraine PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW THE INTERNATIONAL LAWYER BOARD OF PROFESSIONAL EDITORS JOHN B. ATTANASIO/MARC I. STEINBERG Co-Editors-in-Chief, SMU Dedman School of Law PATRICIA S. HEARD Co-Executive Editor SMU Dedman School of Law BEVERLY CARO DURÉUS Co-Executive Editor SMU Dedman School of Law CHRISTOPHER H. HANNA Associate Editor SMU Dedman School of Law EXTERNAL ADVISORY BOARD WERNER F. EBKE Chair, University of Heidelberg, Germany MADS ANDENAS University of Leicester ROGER S. CLARK Rutgers University, Camden ROBERT LUTZ Southwestern University RICHARD M. BUXBAUM University of California at Berkley DON S. DEAMICIS Ropes & Gray, LLP JOHN F. MURPHY Villanova University ALBERT CHEN Hong Kong University HILARY K. JOSEPHS Syracuse University JOHN E. NOYES California Western MARILYN J. KAMAN District Court Judge, Minneapolis, Minnesota SMU FACULTY ADVISORY BOARD Chair NDIVA KOFELE-KALE ANTHONY COLANGELO JEFFREY GABA JEFF KAHN JOHN LOWE GEORGE MARTINEZ DANA NAHLEN* XUAN-THAO NGUYEN JOSEPH J. NORTON CHRISTOPHER OLIVE* ELEN SMITH PRYOR ROBERT RENDELL* JENIA IONTCHEVA TURNER PETER WINSHIP THE INTERNATIONAL LAW REVIEW ASSOCIATION An Association of The International Lawyer and Law and Business Review of the Americas SOUTHERN METHODIST UNIVERSITY DEDMAN SCHOOL OF LAW 2010-2011 STUDENT EDITORIAL BOARD NICOLE HAY President THE INTERNATIONAL LAWYER VIRGINIA SIMMS TIFFANY CRAVEY Editor-in-Chief Managing Editor LAURIE ARNOLDY BENJAMIN BARMORE SEAN BELLAH JENNIFER LAUREN BRANSON Contents Editor PATRICK MILLER Associate Managing Editors JAMES BRYAN MONICA FRUGIA RAMIREZ PEI-CHIH “PEGGY” HO KIM HODGMAN Senior Note & Comment Editor COREY TANNER-ROSATI Latin America Reporter ALLEN UNZELMAN LAW AND BUSINESS REVIEW OF THE AMERICAS OCTAVIO DOMINGUEZ ALEX FARR Editor-in-Chief Managing Editor RYAN SUMMER SMITH COREY TANNER-ROSATI TARA TROUT FLUME KATHERINE MARIE TULLOS Case Note & Comment Editors LAURIE ARNOLDY JAMES BRYAN Manager of Business Development ANN CHAO Canada Reporter SOJI JOHN Technology Editor SEAN BELLAH Administrative Editor KATHERINE MARIE TULLOS NAFTA Reporter CHAD BOND Citations Editor CHRIS WOLF Year-In-Review Editor JENNIFER LAUREN BRANSON Articles Editors DAVID BAILEY BENJAMIN BARMORE JENNIFER HAY JARED INMAN THARA MATTHEWS GREG MCALLISTER CHASE MEDLING JARED PACE JONATHAN RAPFOR JAMES RICHARDS JARRETT SACKS RYAN STARBIRD AARON STENDELL J. CARSON TRIMBLE CHRISTOPHER VILLA THOMAS WYNNE PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Staff Editors ALISE ABEL JESSICA ANDERSON KATIE ANDERSON TOM ANNIS ALEXANDRA ASHCROFT MIRANDA BARTON CHARLOTTE BLUM CHRISTINA M. BONFIELD CRAIG CARPENTER GRANT CARSON ASHLEY CLINE SEAN COTE AMY ANN CRAWFORD KATHY DANG JUANITA DELOACH JULIE DEWEESE JENNA EDWARDS JESSICA EDWARDS CARLY A. FEUERBACHER JOSEPH RYAN FOWLER ALEXANDRA GOSSETT JULIETA GRINFFIEL MICAH GRODIN SAM HAMANN JACOB HIGGINS BRANDON HURWITZ DREW JONES KEVIN LAMARCA KATE LANDRUM DAVID LANTHAM LAURIE LINDEN BRETT LOMAX DAVID LOWRIMORE DAMON MATHIAS BRENNAN MEIER BRAD MONK CATRIONA MORRISON SARAH OCHSANKEHL STEPHEN ONEAL CAITLIN PAVER CHRISTIE PHAN LAURA LEIGH PICKENS LINA DEL PILAR FORERO-NINO MAYA QUEVEDO BROOKE RELYEA ASHLEY ROBERTSON BRIAN RUSSELL YON SOHN JOHN SOKATCH REBECCA STOWE VERA SUAREZ RAZIEH TAVAKOLI ESMERALDA TINAJERO DOROTHY TRAN JUDD JODY WALKER COURTNEY WHITE ROBERT EVETT WILSON BRIAN ZELMAN KATHLEEN ZUGSAY TALIBRA FERGUSON Administrative Assistant *ADJUNCT FACULTY PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW THE INTERNATIONAL LAWYER THE INTERNATIONAL LAWYER (ISSN 0020-7810) is the quarterly publication of the American Bar Association’s Section of International Law and Practice. It has a worldwide circulation. Publication policy: The objectives of THE INTERNATIONAL LAWYER are to • publish high quality articles on international subjects; • inform its readers of significant current legal developments throughout the world; • foster and record the activities of the Section and its committees. The journal focuses on practical issues facing lawyers engaged in international practice. Thus, the editors are interested primarily in topics concerning trade, licensing, direct investment, finance, taxation, litigation and dispute resolution. They will, however, also consider public international law topics. Article Submissions: Articles submitted for publication should not exceed 10,000 words (including endnotes). Text and endnotes should be double-spaced. Endnotes must conform to the most recent edition of The Bluebook: A Uniform System of Citation (Harvard Law Review Association). The Journal does not accept unsolicited student-written submissions nor does it consider articles or reports that have been or are to be published elsewhere. All article submissions must be sent in an electronic Word format. Submit to [email protected] or send a hard copy with an electronic Word-formatted copy of the article to Editor-in-Chief, THE INTERNATIONAL LAWYER, Southern Methodist University, Dedman School of Law, P.O. Box 750116, Dallas, TX 75275-0116 [phone: 214-768-2061; fax: 214-768-1633]. Manuscripts receive peer review, which usually takes three to four weeks. Publication is normally nine to twelve months after a manuscript is accepted. The editors of THE INTERNATIONAL LAWYER reserve the right to move an accepted manuscript from the committed issue to a later issue. Manuscripts are submitted at the sender’s risk. The editors do not return unsolicited material. Material accepted for publication becomes the property of the Section, which pays no fee for any manuscript. Subscription Price: Section annual membership dues $55.00 (Free for law students) include a $12.00 subscription to THE INTERNATIONAL LAWYER. The current annual subscription rate for nonmembers is $60.00 ($75.00 if mailed outside the United States). Reprint Permissions: Except as stated on the first page of specific articles, requests to reproduce any portion of this issue should be addressed to Manager, Copyrights and Licensing, American Bar Association, 321 N. Clark Street, Chicago, IL 60610 [phone: 312-988-6102; fax: 312-988-6030; email: [email protected]]. Order Information: The special spring Year-in-Review issue is available for $30.00 per copy, and most other issues may be purchased for $10.00 each, plus $3.95-$5.95 for shipping and handling, from the American Bar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60610 [phone: 800-285-2221; fax: 312-988-5568; e-mail: [email protected]]. Back issues three years ago and earlier may be purchased from WILLIAM S. HEIN & CO. INC., 1285 Main Street, Buffalo, NY 142091987 [phone: 800-828-7571; fax: 716-883-8100; e-mail: [email protected]]. Back issues can be found in electronic format for all your research needs on HeinOnline [http://heinonline.org/]. Address Changes: Send all address changes to THE INTERNATIONAL LAWYER, American Bar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60610. Advertising: Address all advertising orders, contracts and materials to: Manager, ABA Publishing Advertising, 321 N. Clark Street, Chicago, IL 60610 [phone: 312-988-6051; fax: 312-988-6030]. Postal Information: Periodicals postage paid at Chicago, Illinois, and additional mailing offices. POSTMASTER: Send all address changes to THE INTERNATIONAL LAWYER, American Bar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60610 [phone: 312-988-5522; fax: 312-988-5568; e-mail: [email protected]]. Copyright 2010 American Bar Association. All rights reserved. Printed in the United States of America. Produced by Joe Christensen, Inc. *Disclaimer: Nothing appearing in this journal necessarily represents the opinions, views or actions of the American Bar Association unless the House of Delegates or the Board of Governors has first approved it. Nothing appearing in this journal necessarily represents the opinion, views, or actions of the Section or its Council unless the Section or its Council has approved it. Visit the ABA Website at www.abanet.org and the Section of International Law homepage at www.abanet.org/intlaw. on acid-free paper. PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECTION OF INTERNATIONAL LAW 2010-2011 Officers: Chair, Salli A. Swartz Chair-Elect, Michael E. Burke, IV Vice Chair, Barton Legum Finance Officer, Gabrielle M. Buckley Liaison Officer, Lisa J. Savitt Secretary/Operations Officer, Ronald A. Cass Policy/Government Affairs Officer, Ronald J. Bettauer Programs Officer, Adam B. Farlow Publications Officer, Marilyn Kaman Membership Officer, Marcelo Bombau Rule of Law Officer, Jason P. Matechak Technology Officer, Robert L. Brown Diversity Officer, Sara P. Sandford Communications Officer, Steven M. Richman At-Large Member, Michael H. Byowitz At-Large Member, A. Joshua Markus Immediate Past Chair, Glenn P. Hendrix ABA Board of Governors Liaison, Mitchell A. Orpett Special Advisor, James R. Silkenat Members of the Council: Section Delegate, Michael H. Byowitz Section Delegate, A. Joshua Markus Co-Editor-in-Chief of The International Lawyer, John B. Attanasio Co-Editor-in-Chief of The International Lawyer, Marc I. Steinberg Editor-in-Chief of The International Law News, Russell Kerr Former Section Chair, Aaron Schildhaus Former Section Chair, Jeffrey Golden Young Lawyer Division Representative, Maha Jweied Law Student Division Representative, Jeffrey L. Anderson Non-U.S. Lawyer Representative, Sam Okudzeto Public International Law Liaison, Linda Jacobson Private International Law Liaison, Harold S. Burman Alternate Private International Law Liaison, Keith Loken International Trade Law Liaison, John T. Masterson, Jr. Non-Governmental Organization Liaison, Karla W. Simon Council Members-at-Large: Jonathan T. Fried Lord Peter Goldsmith Jonathan G. Granoff William Howard Taft IV Bernard Vatier Fiona Woolf Louraine Arkfeld Hans Corell Term Expires: 2011 2011 2011 2011 2011 2011 2012 2012 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW David M. Crane Meyer Eisenberg Fali Nariman David Stewart Laurel Bellows Karen J. Mathis Ved P. Nanda Robert Stein Louise Ellen Teitz Ruth G. Wedgwood 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 Division Chairs: Africa/Eurasia, Victor S. Mroczka Americas/Middle East, Mark E. Wojcik Business Law I, Fiona Anne Schaeffer Business Law II, Paul M. Lalonde Business Regulation, Marcy Stras Constituent, Ingrid Busson Disputes, Robert F. Brodegaard Finance, Melida Hodgson Legal Practice, Albert Garrofe Public International Law I, Kevin Michael O’Gorman Public International Law II, Isabella Bunn Tax, Estate, & Individuals, Anders Etgen Reitz Year-in-Review Co-Editor, Mark E. Wojcik Year-in-Review Co-Editor, William B.T. Mock, Jr. PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW THE INTERNATIONAL LAWYER SPRING 2011 Volume 45 Number 1 CONTENTS International Legal Developments Year in Review: 2010 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William B.T. Mock, Jr. Mark E. Wojcik 1 Business Regulation Customs Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yohai Baisburd John Boscariol Cyndee B. Todgham Cherniak David G. Forgue Laura Fraedrich Geoffrey M. Goodale Gwendolyn Hassan Greg Kanargelidis Christine H. Martinez Martin Masse Matthew T. McGrath Cortney O’Toole Morgan Julia S. Padierna-Peralta David Salkeld Deep SenGupta Christopher H. Skinner 3 Export Controls and Economic Sanctions . . . . . . . . . . . . . . Michael L. Burton Kara M. Bombach Dan Fisher-Owens Stephanie Brown Cripps J. Daniel Chapman John Boscariol Paul M. LaLonde Cyndee Todgham Cherniak 19 International Antitrust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bruno L. Peixoto Mark Katz Jim Dinning Lucı́a Ojeda Cárdenas Claire Webb Ausra O. Pumputis Paul Schoff Jing Chua Peter Wang Yizhe Zhang 39 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Pallavi S. Shroff Arshad Paku Khan Harman Sandhu Gunnar Wolf Michael Clancy Laurie-Anne Grelier François Brunet Eric Paroche Susanne Zuehlke Jan Philipp Komossa Eytan Epstein Tamar Dolev-Green Vassily Rudomino German Zakharov Stephen Kon Gordon Christian Kamya Rajagopal Gayle Smith Heather Irvine Christopher Kok International M&A and Joint Ventures . . . . . . . . . . . . . . . . . . . . . . Saúl Feilbogen Vanessa Balda Marcelo Bombau Marcelo den Toom Ezekiel Solomon Andrew Finch Michael Scarf Paul Luiki Maria Thierrichter Gordon Cameron Sandra Walker Miroljub Maćes̆ić Jelena Zjacic Vagn Thorup Jacob Hoegh Madsen William Kanta Dr. Hartmut Krause H. Jayesh Bhara Budhalia Nitu Agrawal Nusrat Hassan Ron Lehmann Fabio Regoli Pamela Fuller Duco de Boer Nancy Matos David Quigg John Horner Asha Stewart Gonzalo Rivera PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW 63 THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Anna Amosova Vassily Rudomino Yevgenya Muchnik Carl Westerberg Leo Lee Florian S. Jörg Fulya Kazbay Trevor Ingle Stephen J. Nelson Daniel L. Gottfried Allison Mason International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pablo M. Bentes Sarah K. Davis John M. Ryan Margaret-Rose Sales Jamie D. Underwood 79 Disputes International Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Steven Smith David Foster Marcus Quintanilla Ivan Cingel Robin Devaux Spencer Jones Kevin Rubino Justin Mates Benjamin Jones Amal Bouchenaki Michael Radine Solomon Ebere 95 International Commercial Mediation . . . . . . . . . . . . . . . . . William A. Herbert 111 Giuseppe De Palo Ava V. Baker Apostolos Anthimos Natalia Tereshchenko Michael Judin International Courts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yulia Andreeva 125 Maurizio Brunetti Ronald E.M. Goodman Guillaume Lemenez Yuri Parkhomenko Candice Pillion Cesare P.R. Romano International Criminal Law . . . . . . . . . . . . . . . . . . . . . Judge Donald E. Shaver 141 International Family Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . Robert G. Spector 147 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Bradley C. Lechman-Su International Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Neale H. Bergman 163 Jonathan I. Blackman Carmine D. Boccuzzi Lorraine de Germiny Phillip Dye, Jr. William Lawrence Matthew D. Slater Karen Woody Howard S. Zelbo Corporate Corporate Social Responsibility . . . . . . . . . . . . . . . . . . . . . . Sarah A. Altschuller 179 Amy K. Lehr Andrew J. Orsmond International Commercial Transactions, Franchising, and Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arnold S. Rosenberg 191 Neil Ray Kimberly A. Palmisano Laura A. Peter Alan S. Gutterman Glenys P. Spence Anders Forkman International Intellectual Property Law . . . . . . . . . . . . . . . . . . Susan Brushaber 205 Robin S. Fahlberg Henry Blanco White Daniel Marugg Stephen W. Feierabend Carolina Keller Jupitz Paul Jones Mariano Municoy Bruce McDonald Matt Hofmeister Navine Karim Carl Kestens Melvyn J. Simburg David Taylor Michelle Wynne Finance International Financial Products and Services . . . . . . . . . . . . . . . Dwight Smith 223 Joseph Yesutis Lloyd Winans Christina LaVera Lennaert Posch Michiel Coenraads PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Mattia Colonnelli de Gasperis Francesca Cazani Walter Stuber Adriana Maria Gödel Stuber International Secured Transactions and Insolvency . . . . . Susan Jaffe Roberts 239 Robin Phelan Autumn Highsmith Mattia Colonnelli de Gasperis Maddalena Sala John E. Rogers Ramiro Rangel Fernando Barrita International Securities and Capital Markets . . João Otávio Pinheiro Olivério 253 Paulo Satoshi Nakamura Walter Douglas Stuber Adriana Maria Gödel Stuber Carlos Fradique-Mendez Adriana Carolina Ospina Jiménez Dr. Manfred Ketzer Dr. Hartmut Krause Ajit Sharma Dr. Md Anowar Zohid David Quigg John Horner Asha Stewart Justin Schluth Walter G. Van Dorn, Jr. Jeffrey Krilla Islamic Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pierre M. Gaunaurd 271 Hdeel Abdelhady Nabil A. Issa Industries Aerospace and Defense Industries . . . . . . . . . . . . . . . . . . . . . . Mark J. Nackman 287 Meredith A. Rathbone Christopher A. Myers William M. Pannier International Energy and Natural Resources Law . . . . . . . . . . . . Ricardo Silva 297 Marcos Rı́os Miroljub Maćes̆ić Leonardo Sempértegui Sean F. Burns Richard Silberstein Fulya Kazbay Omer Gokhan Ozmen Tolga Cabakli PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Transportation Law . . . . . . . . . . . . . . . . . . . . . . . Mark J. Andrews 313 James H. Bergeron Leendert Creyf Catherine Erkelens Lorraine B. Halloway Gerald F. Murphy Douglas Schmitt Tax, Estate and Individuals Immigration and Naturalization Law . . . . . . . . . . . . . . . . . . . . David W. Austin 329 Qiang Bjornbak Josh D. Friedman Public International Law Anti-Corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leslie Benton 345 Jeffrey Clark Mikhail Reider-Gordon Anne Takher Anti-Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . Mikhail Reider-Gordon 365 International Human Rights . . . . . . . . . . . . . . . . . . . . . . . Lawrence G. Albrecht 381 Christina Holder Benjamin G. Joseloff Glenn Katon Margaret Lawrynowicz Diane Post Hansdeep Singh International Art and Cultural Heritage . . . . . . . . . . . . . . . . Patty Gerstenblith 395 International Environmental Law . . . . . . . . . . . . . . . . . . . . . . David R. Downes 409 Derek Campbell Joseph W. Dellapenna Joseph Freedman Richard A. Horsch David Hunter Erika Lennon Erica Lyman Stephen J. Porter Thomas Parker Redick R. Justin Smith Hong Tang National Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . John Harrington 425 Sean Murphy Jason Poblete Jonathan M. Meyer PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Regional and Comparative Law Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adejoke Babington-Ashaye 435 Harriet O. Acheampong Nana Yaa Anyane-Yeboa Horejah Bala-Gaye Michael Becker Susan Joy Bishai Mark J. Calaguas Russell W. Dombrow Uche Ewelukwa Ofodile Christina Holder Deborah L. Houchins Dia Tumkezee Kedze William Kosar Gustavo Morales Oliver Deborah Osiro Kyle Reynolds Nchimunya Ndulo Ricardo Silva Varsha N. Trottman April F. Williams-Shaw Asia/Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . William A. Herbert 455 Nicholas Rudd Steve Saunders Sohee Yun Ji Woong Lim Philippe Shin Byung-Tae Kim Jinyoung Ashley Yu Hoseok Jung Ji-Yeon (Rachel) Yoo Albert Vincent Y. Yu Chang Jeffrey Sok Ricardo Silva John E. Frangos Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sandra Walker 471 Mark Katz Jim Dinning Marcela B. Stras John Boscariol Sergio R. Karas China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jordan Brandt 487 Elizabeth Cole Paul B. Edelberg Kelly Frazier Robin Gerofsky Kaptzan Alice Leung PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Jin Ma Susan Ning Huang Tao Adria Warren Jeffrey Wilson Yang Yang Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Elena Sabkova 505 Dany Khayat José Caicedo Dr. Mark C. Hilgard Dr. Jan Kraayvanger Till Feldmann Victoria Popova Rick Silberstein Dr. Florian S. Jörg India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vandana Shroff 521 Ashish Jejurkar Nanda Shah Latin America and Caribbean . . . . . . . . . . . . . . . . . . . . . Patricia V. de L. Guidi 537 Marcos Rı́os Sergio Arbeleche Paula Beveraggi Marcelo Bombau Ana Lucı́a Ferreyra Adrián Lucio Furman Ángeles Murgier Guillermo Malm Green Valeria Kemerer Fernando Aguirre Rogério Damasceno Leal Fernanda Pessanha do Amaral Gurgel Alexandre Ribeiro do Valle Daniel Stein Francisco Ugarte Nelly Pazó Juan José Bouchon Fernando Bermúdez Leonardo Sempértegui John R. Pate Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Patrick Del Duca 555 Pedro E. Corona de la Fuente Ernesto Velarde-Danache Jay F. Stein Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Anahita Ferasat 561 Derek White Lamia Dalichaouch PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Jenna DiCocco Jason Tauches Orly Gerbi Eric A. Savage James Weir David Pfeiffer Lulwa Al Ben Ali Elias R. Chedid Georgette Salamé Caitlin Stapleton Rina Shah Joseph F. Jacob Sarah Al-Shawwaf Brian J. Vohrer Kinan H. Romman Vandana Rupani Hassan Elsayed John C. Boehm, Jr. Mark E. Bisch Stanley Rice Tania Ghossein Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Andrey Y. Astapov 581 Oleh A. Beketov Scott Brown Gene M. Burd Dmitri Evseev Irina Nazarova Yaroslav Petrov Olena Shcherbyna Yaroslav Shkvorets Nikolai Sorochinskiy PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Legal Developments Year in Review: 2010 WILLIAM B.T. MOCK, JR.* AND MARK E. WOJCIK** This issue of The International Lawyer marks the fifteenth year that the American Bar Association Section of International Law has published an annual survey of significant developments in international and foreign law. The articles in this volume, as in previous years, are submitted by various committees of the section and represent tremendous contributions of time and talent from hundreds of individuals. The authors and editors hope to provide you with a handy, one-volume resource that covers the most significant developments during the past year, including developments ranging from international litigation, international arbitration, and international courts to a wide variety of public international law, comparative law, and human rights law issues. Together with past volumes, this issue provides you a continuous record of enormous practical and scholarly value. Because of the size of this enormous undertaking, none of our committees had enough room to describe fully all of the important developments during the past year. The committees were asked to produce work under strict word count limits of 7,000 words (including footnotes), summarizing significant developments in only a few words. The omission of a certain event from a committee’s report should not be construed to mean that a particular event last year was unimportant. The section imposes such a severe word count restriction because of rising production costs to print and mail this issue, to reduce the time necessary to edit and produce this issue, and to ensure that you would still be able to lift up the final printed issue when it arrived at your office. We want the issue to be one that you stick in your briefcase rather than stick on your shelf. Our work as co-editors of this project was facilitated by a small army of deputy editors, committee editors, and law student editors. The committee editors, appointed by each committee, worked directly with the authors and spent many hours coordinating the articles for timely submission. They are thanked directly in each article, but we thank all of them again here for their contributions and assistance. The twenty-three deputy editors did the first edits after articles were submitted for publication. They spent long hours under short deadlines to review the articles and prepare them for publication. They volunteered their expertise in legal writing and editing, * Professor of Law, The John Marshall Law School, Chicago, Illinois. ** Professor of Law, The John Marshall Law School, Chicago, Illinois. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 2 THE INTERNATIONAL LAWYER as well as immense experience in international law subjects. Here are the names of the deputy editors who helped produce this year’s international law year in review. Prof. David W. Austin (California Western School of Law) Prof. Brooke Bowman (Stetson University College of Law) Prof. Cindy Buys (Southern Illinois University School of Law) Prof. Juli V. Campagna (Hofstra University School of Law) Prof. Kim D. Chanbonpin (The John Marshall Law School–Chicago) Prof. Cara L. Cunningham (University of Detroit Mercy School of Law) Prof. Gianmario Demuro (University of Cagliari, Italy) Prof. William V. Dunlap (Quinnipiac University School of Law) Prof. Sharon E. Foster (University of Arkansas–Fayetteville, Leflar Law Center) Prof. Frank Gulino (Hofstra University School of Law) Prof. Kimberly Holst (Arizona State University School of Law) Prof. Jennifer B. Horn (Texas Tech University School of Law) Prof. Linda M. Keller (Thomas Jefferson School of Law) Prof. Nadia E. Nedzel (Southern University Law Center) Prof. Anthony Niedwiecki (The John Marshall Law School–Chicago) Prof. Ann L. Nowak (Touro Law Center) Prof. Jason Palmer (Stetson University College of Law) Prof. Lauren Redman (University of Lucerne Faculty of Law, Switzerland) Prof. Ellen Saideman (Roger Williams University School of Law) Prof. Kathryn Thompson (Roger Williams University School of Law) Prof. John B. Thornton (Northwestern University School of Law) Prof. Christine M. Venter (Notre Dame Law School) Prof. Gregory Voss (Toulouse Business School Group, France) In addition to those named, we wish to thank all of the authors who contributed to the submissions in this issue. Without them, there simply would not have been an issue. Finally, we thank the students and professional staff at Southern Methodist University Dedman School of Law who worked on The International Lawyer. Under the leadership of managing editor Tiffany Cravey and supervising faculty member Beverly Duréus, the SMU team transformed dozens of separate articles into a cohesive volume, consistent in format and citation and ready for final publication. Their hard work, long hours, and consistent dedication to this project cannot be overstated. This volume represents contributions from hundreds of persons around the world. We hope that you find it to be useful and interesting. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Customs Law YOHAI BAISBURD, JOHN BOSCARIOL, CYNDEE B. TODGHAM CHERNIAK, DAVID G. FORGUE, LAURA FRAEDRICH, GEOFFREY M. GOODALE, GWENDOLYN HASSAN, GREG KANARGELIDIS, CHRISTINE H. MARTINEZ, MARTIN MASSE, MATTHEW T. MCGRATH, CORTNEY O’TOOLE MORGAN, JULIA S. PADIERNA-PERALTA, DAVID SALKELD, DEEP SENGUPTA, AND CHRISTOPHER H. SKINNER* I. Introduction The year 2010 brought significant developments in both United States and Canadian customs law. The influences of heightened economic and security concerns, in particular, were evident in such areas as trade agreements, trade enforcement, customs enforcement, import security, and import safety. This article highlights the year’s developments in these and other areas. II. Judicial Review of Customs-Related Determinations A. FEDERAL CIRCUIT CASES 1. Totes-Isotoner Corp. v. United States1 In Totes-Isotoner, the Federal Circuit considered whether the Harmonized Tariff Schedule of the United States (HTSUS) “unconstitutionally denie[d] equal protection of the laws by imposing different rates of duty on seamed leather gloves ‘for men’ and seamed * The authors are all attorneys who specialize in international trade law: Yohai Baisburd, White & Case LLP, Washington, D.C.; John Boscariol, McCarthy Tétrault LLP, Toronto, Ontario; Cyndee Todgham Cherniak, McMillan LLP, Toronto and Ottawa, Ontario; David G. Forgue, Barnes, Richardson & Colburn, Chicago, IL; Laura Fraedrich, Kirkland & Ellis LLP, Washington, D.C.; Geoffrey M. Goodale, Foley & Lardner LLP, Washington, D.C.; Gwendolyn Hassan, Navistar, Inc., Chicago, IL; Greg Kanargelidis, Blake Cassels & Graydon LLP, Toronto, Ontario; Christine H. Martinez, Barnes, Richardson & Colburn, Chicago, Illinois; Martin Masse, McMillan LLP, Ottawa, Ontario; Matthew T. McGrath, Barnes, Richardson & Colburn, Washington, D.C.; Cortney O’Toole Morgan, Barnes, Richardson & Colburn, Washington, D.C.; Julia S. Padierna-Peralta, Hogan Lovells US LLP, Washington, D.C.; David Salkeld, Arent Fox LLP, Washington, D.C.; Deep SenGupta, Trade & Customs Advisory Services at FedEx Trade Networks, San Francisco, California; and Christopher H. Skinner, Squire, Sanders & Dempsey LLP, Washington, D.C. 1. Totes-Isotoner Corp. v. United States, 594 F.3d 1346 (Fed. Cir. 2010). 3 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 4 THE INTERNATIONAL LAWYER leather gloves ‘for other persons.’”2 The Court of International Trade had dismissed Totes-Isotoner’s case for failure to state a claim upon which relief could be granted and the Federal Circuit agreed with that result. First, the Federal Circuit considered certain procedural matters and ruled that the Court of International Trade had jurisdiction under 28 U.S.C. § 1581(i), Totes-Isotoner had standing to bring the case, and the political question doctrine did not apply. But the Federal Circuit found that Totes-Isotoner failed to state a claim. The Federal Circuit noted that “[a]bsent a showing that Congress intended to discriminate against men in the tariff schedule, we cannot simply assume the existence of such an unusual purpose from the mere fact of disparate impact.”3 Because the challenged provision was not facially discriminatory, Totes-Isotoner needed to demonstrate that the government had the purpose to discriminate, and Totes-Isotoner had failed to do so. 2. Michael Simon Design, Inc. v. United States4 Michael Simon and other importers challenged modifications made to the HTSUS by Presidential proclamation. The U.S. Court of International Trade denied their request for judicial review and the Federal Circuit affirmed. The appellants challenged the Court of International Trade’s conclusion that the relevant statute gave the President complete discretion to accept or reject the International Trade Commission’s proposed modifications to the tariff schedule. The Federal Circuit affirmed “[b]ecause the acts that the appellants complain of are either non-final or not agency actions, and because judicial review is precluded even outside the APA [Administrative Procedure Act] framework due to the discretionary nature of the President’s authority under [the law].”5 3. Outer Circle Products v. United States6 The plaintiff imported bottle and jug wraps. U.S. Customs and Border Protection (CBP) classified these items under heading 4202, HTSUS, dutiable at 19.3%. Outer Circle argued for classification under heading 3924, HTSUS, dutiable at 3.4%. The Court of International Trade agreed with CBP, but the Federal Circuit reversed and ruled for Outer Circle. The Federal Circuit applied its previous analysis of heading 4202, which provided that heading 4202 does “not include containers that organize, store, protect, or carry food or beverages.”7 Because the Federal Circuit held that Outer Circle’s bottle and jug wraps did “organize, store, protect, or carry food or beverages,” the court ruled that the bottle and jug wraps could not be classified under heading 4202.8 The Federal Circuit agreed that the proper classification was HTSUS subheading 3924.10.50.9 2. 3. 4. 5. 6. 7. 8. 9. Id. at 1349. Id. at 1357. Michael Simon Design, Inc. v. United States, 609 F.3d 1335 (Fed. Cir. 2010). Id. at 1338. Outer Circle Prods. v. United States, 590 F.3d 1323 (Fed. Cir. 2010). Id. at 1326. Id. Id. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CUSTOMS LAW 5 4. Chrysler Corporation v. United States10 CBP denied Chrysler’s claim for Harbor Maintenance Tax payments on exports made prior to July 1, 1990. These payments had previously been declared unconstitutional. Prior to July 1, 1990, CBP required claimants for refunds of payments to submit documentation to support the refunds, and Chrysler failed to submit such documentation.11 The Court of International Trade agreed with CBP, and the Federal Circuit affirmed, with one judge dissenting. The Federal Circuit agreed, among other things, that Chrysler did not offer any reason to invalidate the regulation requiring documentation for pre-July 1, 1990 export payments.12 B. COURT OF INTERNATIONAL TRADE CASES 1. Hitachi Home Electronics (America), Inc. v. United States13 Hitachi brought an action in the Court of International Trade seeking resolution of protests that had been pending with CBP for more than two years without resolution. Hitachi argued that the protest should be deemed allowed and that duties should be refunded. The Court of International Trade dismissed the case without prejudice, noting that “neither the statute nor the regulation specifie[d] any consequences for the failure to allow or deny a protest within the two-year period.”14 The court also considered the legislative history and found that CBP’s actions within the two-year period were directory and not mandatory.15 As a result, the Court of International Trade lacked the necessary subject-matter jurisdiction to consider the merits.16 2. Canex International Lumber Sales Ltd. v. United States17 Canex involved the classification of angle-cut lumber and a claim that CBP violated 19 U.S.C. § 1625(c) by effectively modifying or revoking two prior ruling letters without prior notice and comment. First, the Court of International Trade held that CBP had not violated § 1625(c) because the merchandise involved in the cited rulings was not identical to the subject imports.18 Then, the Court of International Trade agreed with CBP’s suggested classification and determined that even though the lumber had been cut, it remained classifiable as wood in heading 4407, HTSUS.19 The Court of International Trade found that the lumber was not sufficiently advanced to be dedicated solely or principally for use as roof trusses or builders’ joinery classifiable in heading 4418.20 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Chrysler Corp. v. United States, 592 F.3d 1330 (Fed. Cir. 2010). See id. at 1332. Id. at 1337. Hitachi Home Elecs. v. United States, 704 F. Supp. 2d 1315 (Ct. Int’l Trade 2010). Id. at 1319. See id. See id. at 1322. Canex Int’l Lumber Sales Ltd. v. United States, slip op. 10-74 (Ct. Int’l Trade June 29, 2010). See id. at 7. See id. See id. at 13. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 6 THE INTERNATIONAL LAWYER 3. Ford Motor Co. v. United States21 The Court of International Trade considered a request for declaratory judgment involving ten reconciliation entries that CBP had not yet actively liquidated. Ford brought seven claims involving the ten entries; however, after the complaint was filed, CBP liquidated six of the entries rendering a number of the claims moot or improperly before the court.22 Therefore, a number of the initial claims were quickly resolved. Although the Court of International Trade recognized that 19 U.S.C. § 1581(i) grants the court the jurisdiction to hear the remaining claims, the court declined to issue the requested declaratory judgment.23 Instead, the court held that Ford could obtain “meaningful judicial review over all legitimate legal claims” related to the remaining entries after they liquidate.24 As a result, the court exercised its discretion not to take jurisdiction of the claims.25 4. Citizen Watch Co. of America, Inc. v. United States26 Citizen challenged CBP’s classification of four different styles of non-corrugated cardboard watch boxes as jewelry boxes and similar articles of heading 4202, HTSUS. The Court of International Trade looked at the durability and intended use of the watch boxes and found that unlike the articles classified in heading 4202, the subject merchandise was not suitable for long-term or prolonged use.27 The court held that the watch boxes may be used for the “packing, transport, storage, and sale of watches,” and, as a result, agreed with the classification Citizen proposed for packing containers of paper or paperboard in heading 4819.28 III. Executive Branch Developments in Customs Law A. UPDATE ON IMPORTER SECURITY FILING (THE “10+2” RULE) On January 26, 2010, after twelve months of flexible enforcement, the filing requirements of the Importer Security Filing (ISF) and Additional Carrier Requirements29 (ISF Rule) became mandatory. According to CBP, “to achieve maximum compliance,” the agency would “apply a measured, common-sense approach to enforcement.”30 CBP mapped out 21. Ford Motor Co. v. United States, slip op. 10-80 (Ct. Int’l Trade July 22, 2010). 22. See id. at 3. 23. See id. at 16, 20. 24. Id. at 20. 25. See id. 26. Citizen Watch Co. of America, Inc. v. United States, slip op. 10-94 (Ct. Int’l Trade Aug. 18, 2010). 27. Id. at 13–17. 28. Id. at 18. 29. Importer Security Filing (ISF) and Additional Carrier Requirements, 73 Fed. Reg. 71,730 (Nov. 25, 2008) (to be codified at 19 C.F.R. pts. 4, 12, 18, 101, 103, 113, 122, 141, 143, 149, 178, and 192). Under the ISF Rule, importers and maritime cargo carriers must submit additional cargo data before lading goods on board vessels destined to the United States customs territory. 30. FAQs: Importer Security Filing “10+2” Program, U.S. CUSTOMS & BORDER PROT., 42 (July 9, 2010), http://www.cbp.gov/linkhandler/cgov/trade/cargo_security/carriers/security_filing/10_2faq.ctt/10_2faq.doc. CBP Headquarters did not issue an official notice of its “graduated” enforcement strategy. The details of this strategy, however, were published in a Public Information Notice (PIN) by the Port of Dallas/Ft. Worth and VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CUSTOMS LAW 7 a quarter-by-quarter enforcement strategy.31 During the first quarter of 2010, CBP’s enforcement efforts would focus on importers failing to file ISFs for United States-bound shipments, which may be subject to non-intrusive inspections (NII) and CBP warning letters.32 In the second quarter of 2010, non-compliant importers would see an increase in manifest holds and cargo examinations.33 In the third and fourth quarters, CBP would continue to increase the amount of manifest holds and cargo examinations, begin assessing liquidated damages, and issue Do Not Load (DNL) messages for lack of compliance.34 CBP’s graduated enforcement strategy contemplated that all proposed penalty cases (i.e., liquidated damages and DNL) would be initiated by the local ports and submitted to CBP Headquarters for review and approval before any penalties would be issued.35 Non-compliant Customs-Trade Partnership Against Terrorism (C-TPAT) participants may be suspended or have their C-TPAT status reduced or revoked.36 On September 10, 2010, the United States Government Accountability Office (GAO) released a report entitled Supply Chain Security: CBP Has Made Progress in Assisting the Trade Industry in Implementing the New Importer Security Filing Requirements, but Some Challenges Remain.37 The report, which Congress had requested, found that CBP’s regulatory assessment generally adheres to the Office of Management and Budget (OMB) guidance but could be improved if CBP practiced greater transparency and a more complete costbenefit analysis.38 The report also concluded that the 10+2 rule data elements were available for identifying high-risk cargo but that CBP has not yet finalized its national security targeting criteria to include these additional data elements to support high-risk targeting.39 The GAO recommended that CBP should, if it updates its regulatory assessment, include information to improve transparency and completeness, and it should establish time frames and milestones for updating its national strategy targeting criteria to include the data collected under the ISF in identifying high-risk shipments.40 Throughout 2010, CBP continued to hold ISF outreach events and to update the agency’s ISF “10+2” Program Frequently Asked Questions document on its web site.41 CBP data shows that between January 26 and November 2, 2010, CBP received 7,893,073 revealed by CBP officials at various public venues a few days before January 26, 2010. See Importer Security Filing (10+2) Talking Points, Pub. Info. Notice, No. DFW 10-008, Port of Dallas/Ft. Worth, U.S. CUSTOMS & BORDER PROT., 1 (Jan. 22, 2010) (on file with the Port). 31. See id. 32. See id. 33. See id. at 2. 34. See id. 35. See id. 36. See id. 37. See Supply Chain Security: CBP Has Made Progress in Assisting the Trade Industry in Implementing the New Importer Security Filing Requirements, but Some Challenges Remain (Publ. No. GAO-10-841), U.S. GOV’T ACCOUNTABILITY OFFICE, Sept. 10, 2010, http://www.gao.gov/new.items/d10841.pdf. 38. See id. at 20. 39. See id. at 35. 40. See id. at 40. 41. CBP ISF/”10+2” 2010 Outreach Schedule, U.S. CUSTOMS & BORDER PROT., 2010, http://www.cbp.gov/ xp/cgov/trade/trade_outreach/09_outreach_schl.xml. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 8 THE INTERNATIONAL LAWYER ISF filings (from a total of 2,428 filers) of which only 2.6% (204,870 filings) were rejected, thus, showing an ISF compliance rate of 97.4%.42 B. UPDATE ON CBP PROPOSAL TO CHANGE FIRST SALE PRICING RULE On January 24, 2008, CBP proposed that in a transaction involving a series of sales, the price actually paid or payable for imported goods when sold for exportation to the United States would be the price paid in the last sale occurring prior to the introduction of goods into the United States (typically the price paid by the buyer in the United States) instead of in the first (or earlier) sale (that is, the sale between the manufacturer and the intermediary).43 If implemented, CBP’s proposed change in transaction value appraisement would have likely resulted in higher import duties, and CBP received a number of comments from concerned U.S. importers. In a September 29, 2010 Federal Register notice, CBP officially withdrew its proposal.44 The withdrawal means that CBP will continue to allow the transaction value of imported merchandise to be based on the price paid by the buyer in the first or earlier sale, if all other requirements for using “First Sale” valuation are met. C. IMPORT SAFETY/FOOD SAFETY/CPSIA DEVELOPMENTS Since late 2009, various agencies involved with regulating imports into the United States have expanded their efforts to coordinate enforcement of the consumer protection and import safety laws. For example, in December 2009, the Department of Homeland Security (DHS) established the Import Safety Commercial Targeting and Analysis Center (CTAC) to coordinate information sharing, targeting, and compliance enforcement efforts. CTAC is run by the CBP and includes the U.S. Consumer Product Safety Commission (CPSC), U.S. Immigration and Customs Enforcement (ICE), U.S. Food and Drug Administration (FDA), and the U.S. Department of Agriculture’s Food Safety and Inspection Service (FSIS). Further, in response to the authority granted in the Consumer Product Safety Improvement Act of 2008 (CPSIA)45 and a significant increased budget authorization, CPSC began issuing detention notices directly to importers for possible violations of its laws and regulations as of June 14, 2010.46 Previously, CBP issued detention notices that included CPSC violations.47 CPSC detention procedures apply to all laws CPSC enforces, not just the CPSIA, and include a description of the alleged violation, its statutory basis, and the 42. Importer Security Filing and Additional Carrier Requirements, “10+2” Compliance Update, U.S. CUSTOMS & BORDER PROT., (Fall 2010) (on file with CBP Office of Field Operations). 43. See Proposed Interpretation of the Expression ‘‘Sold for Exportation to the United States’’ for Purposes of Applying the Transaction Value Method of Valuation in a Series of Sales, 73 Fed. Reg. 4254–4255 (Jan. 24, 2008). 44. Withdrawal of Notice of Proposed Interpretation of the Expression ‘‘Sold For Exportation to the United States’’ as Used in the Transaction Value Method of Valuation in a Series of Sales Importation Scenario, 75 Fed. Reg. 60,134 (Sept. 29, 2010). 45. See Consumer Product Safety Improvement Act of 2008, Pub. L. No. 310-113, 122 Stat. 3016 (2008) (codified as amended at 15 U.S.C. § 2051 n. (2010)). 46. CPSC Detention of Products at Import: Frequently Asked Questions, CONSUMER PROD. SAFETY COMM’N, (June 30, 2010), http://www.cpsc.gov/businfo/detentionFAQ.pdf. 47. See id. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CUSTOMS LAW 9 contact information for the CPSC inspector who examined the goods.48 A violation could result in sanctions under both the consumer safety laws (Title 15 of the United States Code) and the customs laws (Title 19 of the United States Code). In addition, CPSC published its revised final rule on civil penalties including imports.49 Finally, the Food Safety Modernization Act (FSMA)50 was signed into law by President Obama on January 4, 2011. The FSMA gives the FDA the right to require recalls of unsafe food products and provides greater federal oversight of food production; authorizes mandatory food recalls in cases of food-borne illnesses; and requires FDA to conduct inspections of food manufacturers on a more frequent basis and to require that food processors have food-safety plans. New developments in issuing regulations and guidance from FDA would come in 2011 and 2012. D. UNIFORM RULES OF ORIGIN PROPOSAL In 2008, CBP proposed the establishment of uniform rules of origin for imported merchandise, for non-preferential purposes, including admissibility, origin marking, trade remedy determinations, and applicable duty rates.51 In July 2010, the Commissioner of Customs indicated in a public letter to several industry and trade associations that CBP and the Treasury Department had reviewed the comments submitted by the interested parties and “expect[ed] to soon be publishing a notice on this matter in the Federal Register.”52 Informal communications have suggested that the proposal will likely be withdrawn, just as the First Sale Rule proposal was formally withdrawn, but no action has been taken to date. E. LACEY ACT UPDATES Implementation of the amendments to the Lacey Act,53 which were contained in the Farm Bill passed by Congress in 2008, continued in 2010. Most notably, the Animal and Plant Health Inspection Service (APHIS) published a proposed rule to define “common cultivar” and “common food crop.”54 Common cultivars and common food crops are categorically exempted from the Lacey Act Amendment declaration requirements that became effective on April 1, 2009. APHIS received a number of comments and intends to reopen the comment period before finalizing the definitions. 48. See id. 49. Civil Penalty Factors, 75 Fed. Reg. 15993 (Mar. 31, 2010) (to be codified at 16 C.F.R. pt. 1119). 50. Pub. L. No. 111-353, 124 Stat. 3885 (Jan. 4, 2011). 51. See Uniform Rules of Origin for Imported Merchandise, 73 Fed. Reg. 43,385 (July 25, 2008) (to be codified at 19 C.F.R. pts 4, 7, 10, 102, 134, and 177). 52. Letter from Alan Bersin, Comm’r of Customs, to Catherine Robinson, Pres. of the Nat’l Ass’n of Mfrs., 2 (on file with the Nat’l Ass’n of Mfrs). 53. Food, Conservation and Energy Act of 2008, Pub. L. No. 110-234, § 8204, 122 Stat. 923 (2008). 54. See Lacey Act Implementation Plan: Definitions for Exempt and Regulated Articles, 75 Fed. Reg. 46,859 (Aug. 4, 2010) (to be codified at 7 C.F.R. pt. 357). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 10 THE INTERNATIONAL LAWYER IV. Legislative Developments in Customs Law A. RECENT DEVELOPMENTS IN TRADE PROMOTION LEGISLATION 1. The Small Business Jobs Act of 201055 The Small Business Jobs and Credit Act of 2010 aims to promote Small Business Exports through the creation of new positions within the Small Business Administration that will focus on export promotion, as well as the allocation of funds for the United States Trade Representative (USTR) to pursue market access and trade enforcement activities. The goal of these activities is to help level the proverbial playing field for small businesses looking to increase their market access. The Act also increases staffing at the Commerce Department to enable further promotion of U.S. exports, including funding of export grants and the State Export Promotion Grant Program (STEP). This Act now requires decisions to fund manufacturing and innovation grants to take into account the potential for export as one of the selection criteria for recipients. 2. The Haiti Economic Lift Program56 The Haiti Economic Lift Program (HELP) extended the Caribbean Basin Trade Partnership Act (CBTPA) and the Haitian Hemispheric Opportunity through Partnership (HOPE) Act until September 30, 2010. This law is designed to increase U.S. and other foreign investment in Haiti’s textile and apparel industry. The law specifically permits Haiti to nearly triple the amount of woven and knit fabrics it can export to the United States duty-free. 3. Extending GSP and the Andean Trade Preference Act House Report 428457 was signed at the very end of 2009, and it extended the Generalized System of Preferences (GSP) and the Andean Trade Preference Act (ATPA) programs through December 31, 2010. B. TRADE ENFORCEMENT LEGISLATION INTRODUCED IN 2010 In 2010, Congress focused significant attention on the trade deficit, most notably the United States’ trade deficit with China. The China Fair Trade Act of 201058 seeks to prohibit the United States Government from purchasing Chinese goods and services until and unless China agrees to the World Trade Organization (WTO) Agreement on Government Procurement. The Emergency China Trade Act of 201059 proposes the withdrawal of normal trade relations from Chinese products in an effort to provide for a “balanced trade relationship” between China and the United States. 55. 56. 57. 58. 59. See Small Business Jobs Act of 2010, Pub. L. No. 111-240, 124 Stat. 2504 (2010). See Haiti Economic Lift Program Act of 2010, Pub. L. No. 110-171, 124 Stat. 1194 (2010). See Pub. L. No. 111-124, 123 Stat. 3484 (2009). S. 3505, 111th Cong. (2010). H.R. 6071, 111th Cong. (2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CUSTOMS LAW 11 While not naming a specific country, the Currency Exchange Rate Oversight Reform Act of 201060 and the Currency Reform for Fair Trade Act61 are widely regarded as being directed at the Chinese trade deficit as they would require the Department of Commerce to investigate currency undervaluation as a “countervailable subsidy,” thus requiring the imposition of duties on imports benefitting from such a subsidy or undervaluation. Several bills were also introduced to address how to sanction other countries who engage in practices the United States disagrees with. The Enforcing Orders and Reducing Circumvention and Evasion Act of 2010 (ENFORCE)62 would reinforce and strengthen U.S. enforcement of trade remedy laws and is specifically targeted at increased enforcement of antidumping and countervailing duty (AD/CVD) issues. Similarly, the Unfair Foreign Competition Act of 201063 would provide for judicial determination of injury in cases of dumped and subsidized merchandise imported into the United States. House Report 1699 alleges that foreign countries have engaged in unfair trade practices in the paper products industry; whereas the Non-Native Wildlife Invasion Prevention Act64 would amend the Trade Act of 1974 to authorize the USTR to take discretionary action if a foreign country is engaging in so-called “unreasonable acts, policies or practices” in relation to the environment, including the introduction of non-native wildlife species that harm our economy, environment, or health. C. THE U.S. MANUFACTURING ENHANCEMENT ACT OF 2010 On August 11, 2010, the President signed the United States Manufacturing Enhancement Act of 2010 into law,65 enacting the first miscellaneous tariff bill (MTB) in nearly three years. The MTB primarily renews tariff suspensions or other modifications that expired on December 31, 2009. But it also includes a few new tariff suspensions and duty reductions that cleared both the House and Senate review process. The law also provides for the retroactive duty treatment for expired provisions that are being renewed by the legislation. A second MTB containing House bills that were originally introduced, but not incorporated into the law, new and existing Senate bills, re-liquidation provisions, and technical corrections was proposed by the House Ways and Means Committee on November 24, 2010 and posted as a discussion draft.66 It is unclear how quickly this much-anticipated second MTB might proceed through Congress. 60. 61. 62. 63. 64. 65. 66. S. 3134, 111th Cong. (2010). H.R. 2378, 111th Cong. (2010). S. 3725, 111th Cong. (2010). S. 3080, 111th Cong. (2010). H.R. 669, 111th Cong. (2009). United States Manufacturing Enhancement Act of 2010, Pub. L. No. 111-227, 124 Stat. 2409 (2010). Omnibus Trade Act of 2010, H.R. 6517, 111th Cong. (2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 12 D. THE INTERNATIONAL LAWYER UNITED STATES–PERU TRADE PROMOTION AGREEMENT The United States–Peru Trade Promotion Agreement (TPA) entered into force on February 1, 2009.67 In February 2010, the Environmental Affairs Council (EAC) held its first meeting under the agreement. The EAC, which is comprised of representatives from both governments, focused on implementation of the Environment Chapter and Annex on Forest Sector Governance (the Forest Annex). The Forest Annex is the first time the United States has included provisions that specifically address environmental concerns; in this case, illegal logging and trade in wildlife. It also promotes sustainable management of natural resources. Peru was given until August 1, 2010 (eighteen months from entry into force of the agreement) to implement its obligations under the Forest Annex. In July 2010, USTR acknowledged that Peru had made “unprecedented changes to its legal and regulatory regimes,” including increasing criminal penalties for environmental crimes and training 3,000 Ecological Police Officers.68 But USTR also announced that it was “deeply concerned” about Peru’s failure to completely implement its obligations under the Forest Annex by the August 1, 2010 deadline.69 The Free Trade Commission (FTC) also held its first meeting in February 2010. The parties reviewed the progress made in the first year of the agreement in several key areas including intellectual property rights and labor commitments. The parties formally established the Committee on Agricultural Trade that will monitor implementation of the agricultural commitments. The parties also established a Standing Committee on Sanitary and Phytosanitary Matters. E. U.S. COURT OF INTERNATIONAL TRADE IMPROVEMENTS ACT In 2010, a new proposed version of the U.S. Court of International Trade Improvement Act (CIT Improvement Act) was promulgated.70 In addition, when it became apparent that the legislation would not be introduced in its current form, it was proposed that certain customs-related aspects of the CIT Improvement Act be included as part of another piece of customs legislation (e.g., the Customs Reauthorization Act).71 While neither the CIT Improvement Act nor any legislation containing customs-related provisions from it were passed by Congress, the strong support that has been expressed for such legislation by numerous trade groups, including the Customs and International Trade Bar Association (CITBA) and the ABA Section of International Law (SIL), makes it seem quite possible that a similar bill could be introduced and passed by Congress in 2011.72 A 67. The United States–Peru Trade Promotion Agreement (TPA) was signed on April 12, 2006. The Peruvian Congress ratified the agreement in June 2006 and the protocol of amendment in June 2007. President Bush signed the US-Peru Trade Promotion Agreement Implementation Act on December 14, 2007. 68. Statement by Ambassador Ron Kirk on the Annex on Forest Sector Governance of the United StatesPeru Trade Promotion Agreement (July 2010), available at http://www.ustr.gov/about-us/press-office/pressreleases/2010/july/statement-ambassador-ron-kirk-annex-forest-sector-gov. 69. Id. 70. See U.S. Court of International Trade Improvement Act (CIT Improvement Act) (Aug. 2010), available at http://www.citba.org/documents/CIT-Act-August2010Version.pdf. 71. Patrick C. Reed, Customs-Related USCIT Jurisdictional Provisions to Be Considered by House Trade Subcomittee, 8 Q. NEWSL. (CUSTOMS & INT’L TRADE BAR ASS’N), Oct. 2010, at 3. 72. See Section of International Law: Customs Law Committee, AM. BAR ASS’N NET, http://www.abanet.org/ dch/committee.cfm?com=IC712000 (last visited Feb. 5, 2011). CITBA initially developed and actively sup- VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CUSTOMS LAW 13 brief summary of some of the key provisions considered for inclusion in other customsrelated legislation is provided below. Under the proposed CIT Improvement Act, the Court of International Trade would be able to review new categories of decisions rendered by CBP. The proposed bill would allow importers to contest CBP decisions relating to (1) the assessment or collection of duties, taxes, or fees, whether voluntarily tendered, under 19 U.S.C. § 1592(c) or (d) or § 1593a(c) or (d), and (2) demands by CBP for payment or repayment of duties, taxes, and fees otherwise than in accordance with 19 U.S.C. §§ 1500 and 1501.73 This first amendment responds to the issue presented in Brother Int’l Corp. v. United States,74 in which the court ultimately held that a payment made after a demand by United States customs is not voluntary.75 The second amendment would harmonize CBP procedures after post-entry regulatory audits with IRS procedures after income tax audits; under this system, the importer would have the option of filing a protest against a demand for payment of additional duties, taxes, or fees, and then, if the protest is denied, the importer would be entitled to commence an action in the Court of International Trade without paying the demanded duties, taxes, or fees.76 The CIT Improvement Act also would amend provisions of 19 U.S.C. §§1504, 1516a, and 1675 relating to the suspension of liquidation of entries in antidumping and countervailing duty cases.77 First, the suspension of liquidation during administrative reviews would remain in effect until the thirty-day period for filing a summons and complaint in the Court of International Trade elapses, which would serve to correct the existing and problematic race to the courthouse that has become necessary because the Commerce Department is supposed to issue liquidation instructions within fifteen days.78 In addition, under the legislation, if a party requests judicial review of a determination in an administrative review or a scope review, liquidation of entries covered by the action would be suspended pending the final disposition of the court, including all appeals, which would make it unnecessary to obtain a preliminary injunction against liquidation.79 Moreover, the CIT Improvement Act would provide that, after the conclusion of judicial review, the provision for deemed liquidation within six months under §1504(d) does not apply to entries subject to judicial review under §1516a, which would help to avoid the possibility that a court decision could be nullified if CBP does not liquidate the entries within the required six-month period, as occurred in Cemex S.A. v. United States.80 In addition, the CIT Improvement Act would make several amendments to statutory provisions in Title 19 and Title 28 of the United States Code regarding customs brokers’ license cases.81 It would expand the Court of International Trade’s jurisdiction over all ported the proposed CIT Improvement Act. The ABA’s SIL, under its blanket authority power, has submitted correspondence in support of the proposed CIT Improvement Act to various members of Congress. 73. See CIT Improvement Act, supra note 70, § 102. 74. Brother Int’l Corp. v. United States, 246 F. Supp. 2d 1318 (Ct. Int’l Trade 2003). 75. See Explanation of August 2010 Legislation, CUSTOMS & INT’L TRADE BAR ASS’N, 8-9, http://www.citba. org/documents/CIT-ACT-EXPLANATION-AUGUST2010.pdf (last visited Feb. 5, 2011). 76. See id. at 9-13. 77. See CIT Improvement Act, supra note 70, § 101. 78. See Explanation of August 2010 Legislation, supra note 75, at 18–20. 79. See id. at 15–17. 80. See id. at 1–2. 81. See CIT Improvement Act, supra note 70, § 201(1). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 14 THE INTERNATIONAL LAWYER possible bases for the denial, suspension, or revocation of a customs broker’s license or the imposition of monetary penalties in lieu thereof.82 The court also would clarify certain statutory terminology (“summons and complaint” replaces “petition”), would resolve an ambiguity in the statute regarding service of process, and would add clarity to provisions governing standing and remedies.83 F. FOREIGN MANUFACTURERS LEGAL ACCOUNTABILITY ACT84 In the last few years, a number of cases have highlighted the relative difficulty in trying to sue a non-U.S. company in U.S. courts. In an effort to remedy the difficulty that U.S. companies face when suing a foreign company in a U.S. court in 2010, both houses of Congress introduced versions of the Foreign Manufacturers Legal Accountability Act. Under the proposed bill, foreign manufacturers of five general categories of imported merchandise will be required to establish a registered agent in the United States who is authorized to accept service of legal process on behalf of the foreign manufacturer or producer. The five general categories are drugs, devices, and cosmetics as described in the Federal Food, Drug, and Cosmetic Act; biological products as described in the Public Health Service Act; consumer products as defined in the Consumer Product Safety Act; chemical substances as defined in the Toxic Substances Control Act; and pesticides as defined in the Federal Insecticide, Fungicide, and Rodenticide Act. The bill currently requires the issuance of regulations that would mandate that the local agent be located in a state with a “substantial connection” to the importation, distribution, or sale of the products, as well as limiting application of the law to foreign manufacturers or producers of a certain size. The bill had not been passed by end of the last Congress. There is significant opposition to the bill from retailers, the United States Chamber of Commerce, the National Association of Manufacturers, and the Consumer Electronic Association. V. Canadian Legal Developments A. FREE TRADE AGREEMENTS In 2010, the Canadian Government continued to pursue numerous bilateral treaties and free trade agreements. Canada negotiated and concluded a free trade agreement with Panama on May 14, 2010. In addition, the Canada-Columbia Free Trade Agreement, the Labour Cooperation Agreement, and the Agreement on Environment Implementation legislation received Royal Assent on June 29, 2010, and will come into force after Columbia completes its domestic process. Further, Canada commenced discussions with Israel to modernize the Canada-Israel Free Trade Agreement and with Costa Rica to modernize the Canada-Cost Rica Free Trade Agreement. Also in 2010, Canada continued negotiations of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). In addition, Canada launched or continued free trade agreement negotiations with Ukraine, Morocco, Korea and the 82. See Explanation of August 2010 Legislation, supra note 75, at 21-22. 83. See id. 84. S. 1606, 111th Cong. (2009); H.R. 4678, 111th Cong. (2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CUSTOMS LAW 15 Caribbean Community, the Dominican Republic, India, and the Central America Four, and it engaged in exploratory discussions with Turkey and Japan. Finally, Canada concluded or signed foreign investment promotion and protection agreements (FIPAs) with Bahrain (concluded February 2010) and Jordan (entered into force December 14, 2009), and it launched or continued FIPA negotiations with China, India, Indonesia, Kuwait, Mongolia, Tanzania, Tunisia, and Vietnam. B. CUSTOMS CASES 1. Cherry Stix Ltd. v. President of the Canada Border Services Agency85 In Cherry Stix Ltd., the Canadian International Trade Tribunal (CITT) held that the transaction value did not apply when the parties to the transactions intended that the property (i.e., title in the goods) would be transferred after importation into Canada. According to the CITT, the intention of the parties, as set out in the vendor agreement, vendor information manual, purchase orders, invoices, and other documentation, is critical to the determination of when a sale takes place (i.e., before or after importation). The CITT did not rule as to which valuation method is appropriate in these circumstances. The Canada Border Services Agency (CBSA) did not appeal this decision and has indicated it intends to pursue legislative changes to define “sale” for customs duties purposes. 2. Ingredia S.A. v. The Canada Customs and Revenue Agency86 Ingredia S.A. serves as an important reminder to practitioners regarding limitation periods for suing the Crown for negligence in customs matters. In this case, the Federal Court of Appeal denied an appeal from a Federal Court decision dismissing an importer’s claim for damages against the Crown regarding the actions of Canada Customs during a high stakes tariff classification dispute. Section 106 of the Customs Act imposes a threemonth limitation period for actions or judicial proceedings against Customs officers for anything done in the performance of their duties under the Act.87 The Federal Court of Appeal agreed with the Federal Court in rejecting the importer’s claim that section 106 applied only to certain enforcement activities and agreed with its finding that the Crown was entitled to invoke the protections afforded to its Customs officers under section 106.88 In applying section 106, both courts held that the cause of action arose more than three months before the importer commenced its action and was therefore barred by the statute of limitations. 3. Tara Materials, Inc. v. President of the Canada Border Services Agency89 In Tara Materials, Inc., the CITT addressed a long-standing issue under the NAFTA Rules of Origin Regulations concerning the use of the average inventory management method for originating and non-originating fungible materials and finished goods. In that 85. 86. 87. 88. 89. Cherry Stix Ltd. v. President of the Can. Border Servs. Agency, [2010] C.I.T.T. (Can.). Ingredia S.A. v. Produits Laitiers Advidia Inc., [2010] F.C. 176 (Can.). Customs Act, R.S.C., 1985, c. 1, § 106 (Can.). Ingredia S.A., [2010] F.C. 176 at 14. Tara Materials, Inc. v. President of the Can. Border Servs. Agency, [2010] C.I.T.T. (Can.). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 16 THE INTERNATIONAL LAWYER case, the United States-based appellant had used both NAFTA originating and nonoriginating materials in its production of artist canvasses, some of which were exported to Canada. Using the average method under Schedule X to the Regulations, the appellant determined that seventy-two percent of the fabric material it used in production of the canvasses was originating. Following an on-site verification, CBSA agreed with the ratio, but ruled that this meant only seventy-two percent of the canvasses exported to Canada could qualify as originating. The appellant took the position that it should be permitted to allocate its production of originating goods to all of its exports to Canada since those exports were less than seventy-two percent of its total production for that year. The CITT denied the appeal; its decision turning largely on the meaning of “inventory” in subsection 7(16.1) of the Regulations. It held that when fungible materials and fungible goods are drawn from the same inventory, the inventory method used for determining the origin of the materials must be the same as that used for the goods. Even though the materials and finished goods were stored in separate rooms in the appellant’s warehouse, the CITT viewed them as coming from the same inventory. Accordingly, the appellant could not designate all of its exports to Canada as NAFTA-originating and instead had to apply the seventy-two percent ratio to each shipment. This decision has been appealed to the Federal Court of Appeal. 4. Volpak Inc. v. President of the Canada Border Services Agency90 This case concerns an appeal by Volpak of the CBSA’s refusal to make a re-determination of the tariff classification of imported chicken breasts. The CBSA’s refusal was based on its decision that the appellant had failed to provide security satisfactory to the Minister of National Revenue. On appeal, the CITT ruled that it did not have jurisdiction to make a re-determination based on the insufficiency of security, stating that its jurisdiction is limited to actual decisions taken by the CBSA pursuant to §60 of the Customs Act. The CITT further rejected Volpak’s argument that the tribunal has exclusive original jurisdiction to deal with all matters broadly related to a customs appeal, finding instead that its power to hear, determine, and deal with appeals and all matters related thereto did not grant it authority to determine all questions of law that arise in any matter before it. The CITT’s narrow view of its jurisdiction as expressed in Volpak should encourage importers to consider carefully the appropriate jurisdiction for appeals of any decisions by CBSA that are not clearly taken pursuant to §60 of the Customs Act. C. ADMINISTRATIVE MONETARY PENALTY SYSTEM UPDATE 2010 also brought important changes to Canada’s Administrative Monetary Penalty System (AMPS) following a Fundamental Review. The AMPS regime consists of a list of numbered “contraventions” that may be assessed against importers and exporters, and in some cases, against customs brokers, carriers, duty free shop licensees, and warehouse operators. The contraventions are treated as absolute liability offenses by the CBSA and are applied at a graduated level so that repeat offenders face increased penalties. The intent of the AMPS regime is to create a program that fosters optimal compliance, institutes a corrective approach to contraventions, and is fair, coherent, and forward-looking. 90. Volpak Inc. v. President of the Can. Border Servs. Agency, [2010] C.I.T.T (Can.). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CUSTOMS LAW 17 In this regard, the penalties are set at relatively modest levels (starting from a minimum of $100 for a first level penalty) with a statutory cap of $25,000 per individual penalty assessment. But, as penalty assessments may be applied to each affected import entry, aggregate penalties can be significant. As a result of the Fundamental Review, the CBSA reset all the penalty amounts in connection with its introduction of a risk-based penalties scheme. The CBSA developed a “penalty grid” to assess the level of harm associated with a given instance of non-compliance. The grid ranks risk using four criteria—national security, health and safety, economics, and international commitments. Under this ranking system, more severe infractions and infractions by higher risk persons are subject to greater penalties. The Fundamental Review also produced ten recommendations that are expected to be implemented in three phases by 2012. Phase I, which was completed in April 2010,91 included the re-setting of the penalty amounts and the elimination of most of the penalties previously assessed as a percentage of the value for duty of the affected entry. Under the new regime, the penalties are set at flat penalty amounts or at fixed amounts that increase for repeat offenders. Phase I also included the introduction of a thirty-day delay in the escalation of penalty levels for low-and medium-risk contraventions. Previously, a highvolume importer with multiple entries on a single day could escalate to the highest penalty level in the course of a single day if identical contraventions were found to have occurred in multiple entries. The thirty-day delay allows the importer thirty days from the date of the first penalty assessment in which to correct its discrepancy or otherwise bring itself into compliance. The thirty-day delay in escalation applies only to certain contraventions that are considered to be in the low- or medium-risk category. The Phase II implementation was announced by the CBSA in Customs Notice 10-020, dated November 17, 2010. Effective December 15, 2010, a new Master Penalty Document was published on the CBSA’s website that incorporates all Phase II changes.92 Among other things, sixty-eight individual marking contraventions will be eliminated in favor of a single marking contravention (new C377), and some 250 other contraventions were consolidated to less than half that amount. In addition, new contraventions were added to the list of those subject to the thirty-day delay in escalation, which was implemented in Phase I. Finally, certain additional improvements will be implemented to enhance the consistency of the application of AMPS across all ports of entry. The implementation process is scheduled to be concluded during Phase III, over the course of the next two years. 91. Customs Notice, CAN. BORDER SERVS. AGENCY, 10-002 (2010). 92. Master Penalty Document, CAN. BORDER SERVS. AGENCY, (Dec. 2010), http://www.cbsa-asfc.gc.ca/ trade-commerce/amps/am-rm-eng.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Export Controls and Economic Sanctions MICHAEL L. BURTON, KARA M. BOMBACH, DAN FISHER-OWENS, STEPHANIE BROWN CRIPPS, J. DANIEL CHAPMAN, JOHN BOSCARIOL, PAUL M. LALONDE, AND CYNDEE TODGHAM CHERNIAK* I. Introduction 2010 witnessed continuing trends in U.S. export control and economic sanctions law and policy as well as steps toward a more consolidated and streamlined regulatory regime. Compliance expectations, the mandated use of outside auditors, penalty levels, and the criminal prosecution of corporations and individuals for alleged violations increased. Iran remained the paramount target of U.S. sanctions efforts, though enforcement of the other sanctions programs proceeded at pace. In hopes of isolating the Ahmadinejad regime and hindering Iran’s refined petroleum capacity, Congress enacted legislation penalizing certain non-U.S. investments involving Iran. In parallel, multilateral sanctions targeting Iran’s financial system demonstrated the power of collective action. Our trading partners such as Canada and the European Union implemented and enforced their own trade controls in ways that increasingly resemble the U.S. system albeit in less cumbersome fashion. Attempting to balance U.S. national security and foreign policy objectives against the calls for efficiency and a positive balance of trade, the Obama Administration launched a bold initiative to reform the U.S. export controls and economic sanctions regulatory, licensing, and enforcement bureaucracy by targeting our key risks and protecting our critical assets. Whether this initiative will result in genuine reform remains to be seen. II. Export Reform Initiative On August 13, 2009, the White House announced a comprehensive interagency review of U.S. export controls, followed by Presidential Study Directive 8 of December 21, 2009, directing the Administration to recommend reforms to the U.S. export control system. * Michael L. Burton (Arent Fox LLP) and Kara M. Bombach (Greenberg Traurig LLP) served as the committee editors. Parts II–IV were written by Dan Fisher-Owens, with thanks to his co-authors at Berliner, Corcoran & Rowe LLP: Benjamin Flowe, Jr., John A. Ordway, Wayne H. Rusch, Ray Gold, Michelle Turner, and Jason McClurg. Stephanie Brown Cripps (Freshfields Bruckhaus Deringer US LLP) and J. Daniel Chapman (Parker Drilling Company) authored Part V (Economic Sanctions). John Boscariol (McCarthy Tétrault LLP), Paul M. Lalonde (Heenan Blaikie LLP), and Cyndee Todgham Cherniak (Lang Michener LLP) drafted Part VI (Canadian Developments). 19 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 20 THE INTERNATIONAL LAWYER The Administration laid out four major reform initiatives: a single export control list, a single licensing agency, a single enforcement agency, and a single information technology (“IT”) platform. These “Four Singles” were described in an April 20, 2010 speech by Defense Secretary Robert Gates and again by National Security Advisor James Jones on June 30, 2010. President Obama announced progress at the U.S. Department of Commerce Bureau of Industry and Commerce (“BIS”)1 Update on August 30, 2010 relating to: 1. Interagency agreement on criteria for creating tiered positive lists of U.S. Munitions List (“USML”)2 and Commerce Control List (“CCL”)3 items, 2. Agreement on the same set of licensing policies for both State and Commerce controlled items, adding clarity and consistency to current International Traffic in Arms Regulations (“ITAR”)4 and Export Administration Regulations (“EAR”)5 controls, 3. An Executive Order to create an Export Coordination Enforcement Center, and 4. Continuing to develop a single IT system. A. THE FOUR SINGLES 1. Single Control List The interagency working group sought to develop independent, objective criteria for evaluating controlled technologies and restructuring the USML and CCL into a single, three-tiered, positive list. • Tier 1: Strictly controlled “crown jewel” technologies available almost solely in the United States, relate to weapons of mass destruction, or confer a critical military or intelligence advantage. • Tier 2: Sensitive items available almost solely from members of multilateral export control regimes. • Tier 3: Broadly available items that confer some military or intelligence advantage, or are otherwise prudent to control, such as for crime control or foreign policy reasons. No tiering criteria or bright-line test for determining whether an item is on the USML has yet been announced. To prevent decontrolled items from defaulting to EAR99, the combined list will likely have “holding” Export Commodity Control Numbers (ECCNs) in lower tiers for those items not within existing ECCNs. Unless the delegation of authorities under the Arms Export Control Act can be amended administratively, the single control list might require legislation because the USML is mandated by statute.6 1. U.S. DEP’T OF COMMERCE BUREAU OF INDUS. & SEC., http://www.bis.doc.gov (last visited Jan. 28, 2010). 2. 22 C.F.R. § 121 (2011). 3. 15 C.F.R. § 774 (2011). 4. 22 C.F.R. §§ 120-30 (2011). 5. 15 C.F.R. §§ 730-74 (2011). 6. Arms Export Control Act, §§ 2751-2799aa-2 (2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW EXPORT CONTROLS 21 2. Single Licensing Agency Perhaps most controversial is the creation of a single licensing agency (“SLA”) to process export licenses now administered by the Department of Commerce, Bureau of Industry and Security (“BIS”), the Department of State, Directorate of Defense Trade Controls (“DDTC”), and the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), with participation by the Department of Defense and other agencies. Nuclear controls administered by the Department of Energy and Nuclear Regulatory Commission are not expected to become part of the SLA. A SLA would provide a one-stop shop for export licensing and classification issues. Concerns have been raised about locating the SLA in one of the existing export control agencies, or within Homeland Security. The Administration has suggested creating an independent agency led by a board of directors representing the numerous administrative stakeholders. The SLA would report to the President, who would appoint the head of the agency, with advice and consent of the U.S. Senate. Creation of a SLA would require congressional agreement in an area where Congress is traditionally resistant. Some harmonization of agency licensing practices, however, could be implemented through administrative action. 3. Single Enforcement Agency (“SEA”) Overlapping jurisdiction in export controls enforcement is also perceived as inefficient. Immigration and Customs Enforcement (“ICE”), the Defense Criminal Investigative Service, Naval Criminal Investigative Service, and the FBI have authority to investigate violations of all types of export controls. BIS, DDTC, and OFAC also have jurisdiction to impose administrative (non-criminal) penalties for violations of their own regulations. The single agency reportedly would have authority only over criminal matters (much like the current system), so the goals of this effort need more explanation. Currently, only BIS’s Office of Export Enforcement reviews license applications, so this would be an increased role for enforcement. The SEA will also have a single policy on voluntary disclosures and penalty mitigation. Full implementation of the SEA could require legislation. The Administration issued an Executive Order on Nov. 9, 2010 establishing an “Export Enforcement Coordination Center” within the Department of Homeland Security, staffed by representatives from the export enforcement agencies and intelligence community.7 This order will, essentially, formalize existing coordination practices. 4. Single IT Platform The Administration has proposed a single IT platform to support efficiency and consistency in licensing and enforcement. The single IT platform would allow the various agencies to access and query the system, minimizing inconsistent determinations and enhancing tracking ability. It would also provide a single point of entry for the exporting community. Development of a single IT platform parallels the development of a single export license application. 7. Exec. Order No. 13,558, 75 Fed. Reg. 69,573 (Nov. 9, 2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 22 THE INTERNATIONAL LAWYER B. PHASED IMPLEMENTATION The Administration announced a three-phase implementation. Phases I and II are devoted to policy and regulatory changes that can be accomplished through administrative actions. Phase III contemplates legislative changes. • Phase I: (i) Improve the export controls system and complete work on the earliest two reforms announced in 2009; (ii) rule changes on encryption (EAR) and dual nationals (ITAR); (iii) establish criteria for tiered controls; (iv) streamline and harmonize interagency license processes; (v) create a unified IT platform; and (vi) establish an integrated enforcement center. • Phase II: (i) Complete two positive, mirrored and tiered CCL and USML lists; (ii) harmonize export agency administrative practices; (iii) adopt common definitions between the ITAR and EAR; (iv) complete IT migration for license review; (v) harmonize enforcement practices and fully implement the Export Enforcement Coordination Center; and (vi) identify items to remove from control lists that require congressional notification and/or proposals to multilateral export regimes. • Phase III: Implement the “Four Singles.” C. PARALLEL LEGISLATIVE EFFORTS Interagency efforts on export reform proceeded in conjunction with separate efforts by the House Foreign Affairs Committee to draft a bill to amend the Export Administration Act,8 which lapsed over a decade ago. III. Dual-Use Export Controls A. RULE CHANGES 1. Encryption A June 25, 2010 interim final rule eliminated product-by-product classification requirements for most 5D992 mass market and 5D002 ENC-Unrestricted (“ENC-U”) items, as well as biennial export reporting for most ENC-U products.9 The new system institutes a one-time registration requirement for companies producing encryption items, plus an annual report of encryption changes to products during the prior year. The rule also implements the December 2009 Wassenaar Arrangement agreed-upon Note 4 to CCL Category 5, Part 2, which decontrols items that do not use encryption for the principal purpose of computing, communications, networking, or information security purposes, and where the cryptographic functions are limited to the specific functions of the item. This builds upon the relaxation of prior review requirements on so-called “an8. Export Administration Act of 1979, Pub. L. No. 96-72, 93 Stat. 503 (Sept. 29, 1979). 9. Encryption Export Controls: Revision of License Exception ENC & Mass Market Eligibility, Submission Procedures, Reporting Requirements, License Application Requirements, and Addition of Note 4 to Category 5, Part 2, 75 Fed. Reg. 36,481 (June 25, 2010) (to be codified at 15 C.F.R. pts. 730, 734, 738, 740, 742, 748, 772, and 774). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW EXPORT CONTROLS 23 cillary” encryption items implemented in 2008.10 The rule also revised performance parameters for 5D002 ENC-Restricted items and liberalized License Exception ENC eligibility for encryption source code and technology. 2. Foreign Direct Product Rule On July 30, 2010, BIS expanded the scope of the so-called “Direct Product Rule” to encompass reexports to embargoed countries not previously covered.11 Under the Direct Product Rule, certain foreign made items are subject to the EAR and require a license or license exception for export because they are the direct products of national-security controlled U.S.-origin technology or software.12 The Direct Product Rule previously applied only to foreign made items reexported to Country Group D:1 countries or Cuba. The rule expanded the country scope to cover all of Country Group E:1, adding Iran, Sudan, and Syria and made conforming revisions to License Exception TSR and licensing guidance. 3. Commerce Control List BIS made several rounds of changes to the Commerce Control List (“CCL”), the most important of which are: a. Third Phase of Comprehensive CCL Review BIS implemented the third and final phase of its comprehensive CCL review, which began in 2007.13 Revisions include: (i) clarifications to existing controls; (ii) elimination of redundant or outdated controls; and (iii) establishment of more focused and rationalized controls. This rule affected numerous ECCNs in Categories 3, 4, 7, 8, and 9. Additional changes were made to the de minimis rules relating to “hot sections” of jet engines and certain encryption items as well as to License Exception APP for computers in EAR 740.7. The rule also removed Regional Stability (RS2) controls for Austria, Finland, Ireland, Sweden, and Switzerland. b. Missile Technology Control Regime BIS implemented changes made to the Missile Technology Control Regime (“MTCR”) Annex agreed to at the 2009 Plenary.14 The rule clarified the meaning of “production facilities” and made changes to ECCNs 1C101, 1C111, 1C117, and 9A101. 10. Encryption Simplification, 73 Fed. Reg. 57,495 (Oct. 3, 2008) (to be codified at 15 C.F.R. pts. 732, 734, 738, 740, 742, 744, 746, 748, 750, 762, 770, 772, and 774). 11. Foreign Direct Products of U.S. Technology, 75 Fed. Reg. 44,887 (July 30, 2010) (to be codified at 15 C.F.R. pts. 732, 736, 740, and 748). 12. 15 C.F.R. § 734.3(a)(4) (2011); 15 C.F.R. § 736.2(b)(3) (2011). 13. Revisions to the Export Administration Regulations Based Upon a Systematic Review of the Commerce Control List: Additional Changes, 75 Fed. Reg. 36,511 (June 28, 2010) (to be codified at 15 C.F.R. pts. 734, 738, 740, 742, 772, and 774). 14. Revisions to the Export Administration Regulations Based on the 2009 Missile Technology Control Regime Plenary Agreements, 75 Fed. Reg. 20,520 (Apr. 20, 2010) (to be codified at 15 C.F.R. pts. 772 and 774). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 24 THE INTERNATIONAL LAWYER c. 2008 and 2009 Wassenaar Arrangement Changes BIS implemented changes made to the Wassenaar Arrangement’s List of Dual Use Goods and Technologies at the 2008 Plenary15 and 2009 Plenary.16 The rules affected ECCNs in all CCL categories and added unilateral U.S. export controls on some items decontrolled by Wassenaar Arrangement revisions. d. New and Proposed Controls for Homeland Security Items BIS implemented the first set of changes identified by an interagency working group reviewing homeland security-related export controls, adding ECCNs to control certain concealed object detection equipment and related software and technology.17 BIS also proposed new controls on infrasound sensors used to detect earthquakes, volcanic eruptions, rocket launches, and nuclear explosions.18 e. Clarification of Crime Control License Requirements BIS updated and clarified controls on certain striking weapons, restraint devices, shotguns, optical sighting devices, electric shock devices, and human execution equipment.19 4. Jurisdictional Scope of Commodity Classification Determinations and Advisory Opinions By interim final rule, BIS clarified that exporters may not treat BIS-issued commodity classifications or advisory opinions as determinations that an item is “subject to the EAR,” and not subject to the jurisdiction of another agency.20 The rule is intended to prevent exporters from circumventing the commodity jurisdiction process by relying on a BIS commodity classification as an implicit ruling that an item is not subject to the ITAR. 5. Elimination of Hard-Copy Documents and Revisions to Recordkeeping Requirements BIS eliminated paper versions of most licenses, notices of denial, return without action notices, classification determinations, License Exception AGR notification results and en15. Wassenaar Arrangement 2008 Plenary Agreements Implementation: Categories 1, 2, 3, 4, 5 Parts I and II, 6, 7, 8 & 9 of the Commerce Control List, Definitions, Reports, 74 Fed. Reg. 66,000 (Dec. 11, 2009) (to be codified at 15 C.F.R. pts. 740, 742, 743, 772, and 774). 16. Wassenaar Arrangement 2009 Plenary Agreements Implementation: Categories 1, 2, 3, 4, 5 Part I, 6, 7, and 9 of the Commerce Control List, Definitions, Reports, 75 Fed. Reg. 54,271 (Sept. 7, 2010) (to be codified at 15 C.F.R. pts. 734, 742, 743, 744, 772, and 774). 17. Revisions to the Export Administration Regulations to Enhance U.S. Homeland Security: Addition of Three Export Control Classification Number (ECCNs) and License Review Policy, 75 Fed. Reg. 14,335 (Mar. 25, 2010) (to be codified at 15 C.F.R. pts. 740, 742, 748, and 774). 18. Addition of New Export Control Classification No. 6A981 Passive Infrasound Sensors to the Commerce Control List of the Exp. Admin. Regulations, and Related Amendments, 75 Fed. Reg. 37,742 (June 29, 2010) (to be codified at 15 C.F.R. pts. 742 and 774). 19. Revisions to the Commerce Control List to Update and Clarify Crime Control License Requirements, 75 Fed. Reg. 41,078 (July 15, 2010) (to be codified at 15 C.F.R. pts. 742 and 774). 20. The Jurisdictional Scope of Commodity Classification Determinations and Advisory Opinions Issued by the Bureau of Industry and Security, 75 Fed. Reg. 45,052 (Aug. 8, 2010) (to be codified at 15 C.F.R. pts. 734 and 748). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW EXPORT CONTROLS 25 cryption review requests, and made related changes to EAR recordkeeping requirements.21 B. SIGNIFICANT ENFORCEMENT CASES Balli Aviation Ltd. On May 11, 2010, Balli Aviation Ltd., a subsidiary of the U.K.-based Balli Group PLC, was sentenced to a $2 million criminal fine and corporate probation for five years for conspiracy to export three Boeing 747 aircraft to Iran. On February 4, 2010, Balli Group and Balli Aviation entered a civil settlement with BIS and OFAC, which includes a civil penalty of $15,000,000–the largest civil penalty imposed under the EAR, of which $2,000,000 is suspended pending no further export control violations. In addition, a five-year suspended denial of export privileges was imposed on both Balli entities. Under the terms of the settlement, Balli Group and Balli Aviation are required to submit to BIS and OFAC the results of independent annual export compliance audits for the next five years.22 Chitron Electronics, Inc. Chitron and two Chinese nationals (one a U.S. resident), were convicted May 17, 2010 of conspiring to violate U.S. export laws and illegally exporting items from the United States to China, including to military end-users. A Chitron manager was also convicted of making false statements on export control documents. The exported electronic equipment is used in electronic warfare, military radar, fire control, military guidance and control equipment, and satellite communications, including global positioning systems.23 On July 22, 2010 the manager was sentenced to eleven months imprisonment (time served), three years of supervised release, and a modest fine. The corporation and the other two individuals are to be sentenced in November of 2010.24 Y-Lan Chen. Yi-Lan Chen, a/k/a “Kevin Chen,” a Taiwanese national, was sentenced on August 27, 2010, to forty-two months in prison on charges of conspiring to illegally export dual-use commodities to Iran. Chen’s corporation and co-defendant, Landstar Tech Company Limited, a Taiwan corporation, was sentenced to one year of probation. The conviction relates to an undercover enforcement operation, where Chen attempted to deliver hermetic connectors and glass-to-metal seals to Taiwan for ultimate delivery to Iran.25 21. Issuance of Electronic Documents and Related Recordkeeping Requirements, 75 Fed. Reg. 17,052 (Apr. 5, 2010) (to be codified at 15 C.F.R. pts. 740, 748, 750, and 762). 22. Don’t Let This Happen To You: An Introduction to U.S. Export Control Law, U.S. BUREAU OF INDUS. & SEC., 10 (2010), http://www.bis.doc.gov/complianceandenforcement/dontletthishappentoyou_2010.pdf. 23. Press Release, U.S. Dep’t of Just., Two Chinese Nationals Convicted of Illegally Exporting Electronic Components Used in Military Radar and Electronic Warfare (May 17, 2010), available at http://www.bis.doc. gov/news/2010/doj05172010.htm. 24. Don’t Let This Happen To You: An Introduction to U.S. Export Control Law, supra note 22, at 16. 25. Press Release, U.S. Dep’t of Just., Taiwan Exporter is Sentenced to Three and A Half Years for Conspiring to Export Missile Components from the U.S. to Iran (Aug. 30, 2010), available at http://www.bis.doc. gov/news/2010/doj08302010.htm. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 26 THE INTERNATIONAL LAWYER IV. Defense Export Controls A. RULE CHANGES Departing from past practice, the State Department solicited formal comments on proposed ITAR changes through Federal Register notices instead of issuing final rules without comment. 1. Proposed Exemption for Foreign Licensee Dual National and Third-Country National Employees Attempting to resolve a long-simmering foreign policy irritant with U.S. allies, DDTC published a proposed rule regarding dual-national and third-country national (“DTCN”) employees of foreign recipients of licensed exports.26 Third-country nationals are nationals of countries different from the recipient’s nationality. The exemption attempts to address the collision of DDTC’s requirement that DTCN employees of a foreign recipient be specifically identified and licensed with the human rights and privacy laws of U.S. allies. The proposed exemption would permit release of defense articles and technical data to DTCNs directly employed by a foreign recipient. Authorization is conditioned on the foreign recipient implementing procedures to prevent unauthorized diversion, such as requiring foreign government security clearance or establishing a screening procedure for employees to determine whether they have “substantive contacts” with restricted or prohibited countries (e.g., China, Sudan, Cuba, etc.), such as travel, contact with agents or nationals of such countries, allegiance to such countries, or acts otherwise indicating a risk of diversion. 2. Draft Brokering Rule On November 25, 2009, DDTC issued a draft proposed rule to amend the ITAR Part 129 brokering regulations.27 The draft expands the definitions of “broker” and “brokering activities,” and removes the precondition of acting “as an agent for others” in return for a “fee, commission, or other consideration.”28 Under the new definition, brokering would include: (1) financing, transporting, or freight forwarding; (2) soliciting, promoting, negotiating, contracting for, or arranging a purchase, sale transfer, loan, or lease; (3) acting as a finder of potential suppliers or purchasers; or (4) taking any other action to assist a transaction involving a defense article or defense service. The proposed rule would expand requirements for prior approval of brokering activities and reporting, and require foreign brokers to register with DDTC and obtain authorization relating to the brokering of reexports of defense articles, even if such reexports were authorized by an existing license. 26. Amendment to the International Traffic in Arms Regulations: Dual National and Third-Country National Employed by End-Users, 75 Fed. Reg. 48,625 (Aug. 11, 2010) (to be codified at 22 C.F.R. pts. 124 and 126). 27. Amendments to the International Traffic in Arms Regulations: Registration & Licensing of Brokers, Brokering Activities, Related Provisions, and Other Technical Changes, U.S. DEP’T OF STATE, (Nov. 25, 2009), http://www. pmddtc.state.gov/DTAG/documents/Part129BrokeringComments.pdf. 28. Id. at 4, 6. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW EXPORT CONTROLS 27 3. Clarification to Technical Data Exemption DDTC amended ITAR 125.4(b)(9) to confirm it applies to technical data “regardless of media or format” and to technical data “taken” out of the United States.29 The rule confirms that the exemption is available for hand-carry exports of ITAR technical data on laptops or portable digital media. 4. Elimination of Pre-Approval Requirement for Proposals DDTC eliminated ITAR 126.8, which required prior approval or notification with respect to certain proposals to foreign persons relating to sales of significant military equipment (“SME”), given the increased efficiency of electronic licensing.30 5. Proposed Modification to Foreign Military Sales/U.S. Government Program Exemption DDTC issued a proposed rule to amend ITAR 126.6, placing more responsibility on the Dept. of Defense (DOD) to monitor use of the Foreign Military Sales (“FMS”) exemption.31 The proposed changes would impose additional administrative burdens (primarily on DOD), update eligible modes of transportation, and extend the exemption to cover DOD sales, grants, leases, or loans of defense articles to assist building the capacity of foreign military forces for specified purposes. B. DDTC POLICIES In addition to publishing proposed ITAR changes for formal comment, DDTC has increased posting of notices and formal guidance on its website. 1. Name, Address, or Registration Code Changes DDTC began using the General Correspondence (“GC”) process to approve U.S. and foreign entity name, address, and registration code changes for licenses and agreements.32 Changes may be approved for multiple licenses and authorizations, no longer requiring each document to be amended. 29. Amendment to the International Traffic in Arms Regulations: Export Exemption for Technical Data, 75 Fed. Reg. 52,625 (Aug. 27, 2010) (to be codified at 22 C.F.R. pt. 125). 30. Amendment to the International Traffic in Arms Regulations: Removing Requirement for Prior Approval for Certain Proposals to Foreign Persons Relating to Significant Military Equipment, 75 Fed. Reg. 52,622 (Aug. 27, 2010). 31. Amendment to the International Arms Traffic in Arms Regulations: U.S. Government Transfer Programs and Foreign-Owned Military Aircraft and Naval Vessels, 74 Fed. Reg. 61,586 (Nov. 25, 2009) (to be codified at 48 C.F.R. pt. 6). 32. U.S. Dep’t of State Directorate of Defense Trade, General Correspondence for Amendment of Existing ITAR Authorizations Due to U.S. Entity Name/Address and/or Registration Code Changes, U.S. DEP’T OF STATE (May 8, 2010), http://www.pmddtc.state.gov/licensing/documents/gl_GCsUS.pdf; U.S. Dep’t of State Directorate of Defense Trade, General Correspondence for Amendment of Existing ITAR Authorizations Due to Foreign Entity Name/Address Change, U.S. DEP’T OF STATE (May 8, 2010), http://www.pmddtc.state.gov/licensing/ documents/gl_GCsForeign.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 28 THE INTERNATIONAL LAWYER 2. Unauthorized Imports On November 25, 2009, DDTC issued a website notice about a U.S. person’s obligations when it receives “a defense article for repair or replacement without” prior notice and without an indication that a temporary import license or exemption has been used.33 The U.S. person is advised to investigate and determine if it has any responsibility for the violation. If not, the U.S. person may apply to return the item in lieu of submitting a voluntary disclosure. 3. Request for License Proviso Reconsideration/Clarification DDTC issued guidance regarding requests for proviso reconsideration or clarification. For DSP licenses, such requests now may be submitted as a (1) “General Correspondence (GC) request,” or (2) a “replacement DSP authorization.”34 C. ELECTRONIC SUBMISSIONS AND ACCESS TO DDTC DDTC now requires that all proposed agreements and Commodity Jurisdiction (“CJ”) requests be submitted to DDTC electronically.35 The MARY Status Retrieval System became available online as of March 8, 2010.36 The D-Trade 2 System uses a DSP-5 license application form as the “vehicle” for submitting agreements and amendments.37 All post-approval documents must be uploaded to D-Trade 2. An applicant may no longer amend previously approved hard-copy agreements, but must first submit electronically a “re-baselined” agreement.38 DDTC guidelines have been modified accordingly.39 Use of electronic Form DS-4076 is now mandatory for commodity jurisdiction (“CJ”) requests and USML category determinations. DDTC prefers that the manufacturer file such requests, and other parties must submit a letter of authorization from the manufacturer.40 33. U.S. Dep’t of State Directorate of Defense Trade, Temporary Import Violations, U.S. DEP’T OF STATE, http://www.pmddtc.state.gov/licensing/documents/WebNotice_TemporaryImportViolations.pdf (last visited Jan. 29, 2010). 34. U.S. Dep’t of State Directorate of Defense Trade, Requests for Proviso Reconsideration and/or Clarification, U.S. DEP’T OF STATE, (July 19, 2010), http://www.pmddtc.state.gov/licensing/documents/gl_proviso.pdf. 35. Amendment to the International Traffic in Arms Regulations: Commodity Jurisdiction, 75 Fed. Reg. 46,843 (Aug. 4, 2010) (to be codified at 22 C.F.R. pt. 120). 36. MARY [Status Retrieval System] provides Industry Users a quick and convenient way to access their DTrade 2 export license statuses. See U.S. Dep’t of State Directorate of Defense Trade, Industry Notice 03/04/ 2010: Full Version of Mary Status Retrieval System Going Live, U.S. DEP’T OF STATE (Mar. 4, 2010), http:// www.pmddtc.state.gov/documents/Industry%20Notice_20100305.pdf. 37. U.S. Dep’t of State Directorate of Defense Trade, Guidelines for Preparing Electronic Agreements, U.S. DEP’T OF STATE, (Apr. 1, 2010), http://www.pmddtc.state.gov/licensing/documents/agreement-Electronic Guidelines.pdf. 38. Id. 39. U.S. Dep’t of State Directorate of Defense Trade, Guidelines for Preparing Electronic Agreements (Revision 2.0) (Apr. 1, 2010), U.S. DEP’T OF STATE, http://www.pmddtc.state.gov/licensing/documents/ agreement-ElectronicGuidelines.pdf. 40. U.S. Dep’t of State Directorate of Defense Trade, CJ Frequently Asked Questions, U.S. DEP’T OF STATE, (Sept. 2009), http://www.pmddtc.state.gov/faqs/documents/FAQ_CJ.pdf (FAQ No. 4). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW EXPORT CONTROLS 29 Although electronic submission is a positive step, the DS-4076 form has limitations. Key fields are character-limited, and an applicant usually will need to attach supporting documents, such as more detailed CJ analysis. Additionally, the form requests information about previous exports. DDTC indicates in the instructions that a disclosure of unlicensed exports on Form DS-4076 does not qualify as a “voluntary disclosure” in accordance with ITAR § 127.12. Thus, exporters seeking CJ determinations for previously exported items may need to file initial voluntary disclosures, contemporaneous with the CJ request or contingent on the outcome of CJ review. D. ENFORCEMENT Xe Services LLC (formerly known as Blackwater Worldwide) “entered into a consent agreement to settle 288 violations of the AECA and ITAR in connection with the unauthorized export of defense articles” (including technical data), provision of defense services (military training to foreign forces), violating license provisos, “sales activity involving a proscribed country,” failure to maintain required records, as well as false statements and omissions.41 Some $42 million in civil penalties were imposed, following 31 disclosures to DDTC—16 directed disclosures and 15 voluntary disclosures.42 AAR International, Inc. “entered into a consent agreement to settle [thirteen] violations of the AECA and ITAR in connection with the unauthorized export of defense articles by Presidential Airways, Inc. and its affiliates Aviation Worldwide Services, LLC; Air Quest, Inc.; STI Aviation, Inc.; and EP Aviation, LLC.”43 These former Blackwater-affiliated companies were purchased by AAR International, Inc.44 No civil penalties were levied, but significant changes to compliance systems for AAR International and its affiliates were exacted by DDTC, including enhancing written compliance procedures, conducting internal audits, engaging outside auditors, and submitting the results to DDTC. Interturbine Aviation Logistics GmbH “entered into a consent agreement to settle [seven] violations of the AECA and ITAR in connection with unauthorized exports of defense articles.”45 In a complex settlement, a total of $1,000,000 million in penalties was imposed, although $900,000 of the penalty was suspended.46 Engaging an outside auditor 41. U.S. Dep’t of State Directorate of Defense Trade, Consent Agreements, 2010: Xe Services LLC, U.S. DEP’T OF STATE, (Aug. 23, 2010), http://www.pmddtc.state.gov/compliance/consent_agreements/XeServices LLC.html. 42. U.S. Dep’t of State Directorate of Defense Trade, Xe Services LLC Consent Agreement, U.S. DEP’T OF STATE, 15, 21-22 (Aug. 16, 2010), http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/Xe_ ConsentAgreement.pdf. 43. U.S. Dep’t of State Directorate of Defense Trade, Consent Agreements, 2010: AAR International, Inc., U.S. DEP’T OF STATE, (July 26, 2010), http://www.pmddtc.state.gov/compliance/consent_agreements/AAR International.html. 44. Andrew J. Shapiro, Lifting of Policy of Denial Regarding Activities of Presidential Airways, Inc. and Its Subsidiaries/Affiliates Regulated Under the International Traffic in Arms Regulations (ITAR), FED. REG., July 23, 2010, http://www.federalregister.gov/articles/2010/07/23/2010-18109/bureau-of-political-military-affairs-liftingof-policy-of-denial-regarding-activities-of. 45. U.S. Dep’t of State Directorate of Defense Trade, Consent Agreements, 2010: Interturbine Aviation Logistics GmbH, U.S. DEP’T OF STATE, (Feb. 3, 2010), http://www.pmddtc.state.gov/compliance/consent_agreements/InterturbineAviation.html. 46. U.S. Dep’t of State Directorate of Defense Trade, Interturbine Aviation Logistics GmbH Consent Agreement, U.S. DEP’T OF STATE, 3-4 (Jan. 4, 2010), http://www.pmddtc.state.gov/compliance/consent_agreements/pdf/IAL_ConsentAgreement.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 30 THE INTERNATIONAL LAWYER to prepare an audit report for submission to DDTC was one of the conditions of the suspension. $400,000 of the suspended penalty must be applied to compliance program enhancements in the event that Interturbine seeks to restore its DDTC registration.47 V. Economic Sanctions During 2010, the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury focused its efforts on strengthening and streamlining a number of its existing programs, while continuing to expand the reach of its more targeted programs against specific individuals, activities, and companies. A. BELARUS, IRAQ, LEBANON, NORTH KOREA, AND SOMALIA In 2010, OFAC issued several new, but separate, sets of sanctions regulations48 to synthesize the existing combination of executive orders, licenses, and other documentation that previously comprised much of its sanctions programs regarding Belarus, Iraq, Lebanon, North Korea, and Somalia. These new regulations did not significantly change the overall structure or effect of these sanctions regimes. Nevertheless, these new regulations adopt certain attributes found only in OFAC’s more recent asset freezing and blocking regimes.49 Under these newer programs, OFAC generally blocks property and interests in property of a person, and identifies the person as a Specially Designated National during the pendency of an investigation. Avoiding some of the ambiguity of earlier asset freezing and blocking programs, these newer sanctions expressly state that, if a blocked party holds, “directly or indirectly, a 50 percent or greater interest” in another entity, then all property or any interests in property held by that entity are blocked (regardless of whether that entity has been specifically identified by OFAC for blocking purposes). Further, some recent sanctions regulations do not provide exemptions previously common to many sanctions regulations for personal communications, informational materials, and travel.50 B. CUBA On March 9, 2010, OFAC announced that it would amend the Cuban Assets Control Regulations to clarify that, in connection with licensed sales of agricultural items during 2010, “the term ‘payment of cash in advance’ shall mean payment before the transfer of 47. Id. at 6. 48. See Belarus Sanctions Regulations, 75 Fed. Reg. 5,502 (Feb. 3, 2010) (to be codified at 31 C.F.R. pt. 548); see also Iraq Stabilization and Insurgency Sanctions Regulations, 75 Fed. Reg. 55,463 (Sept. 13, 2010) (to be codified at 31 C.F.R. pt. 576); Lebanon Sanctions Regulations, 75 Fed. Reg. 44,907 (July 30, 2010) (to be codified at 31 C.F.R. pt. 549); North Korea Sanctions Regulations, 75 Fed. Reg. 67,912 (Nov. 4, 2010) (to be codified at 31 C.F.R. pt. 510). 49. See, e.g., Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. pt. 544 (2011). 50. The new North Korea Sanctions Regulations and the Somalia Sanctions Regulations do not exempt specific types of informational transactions. These sanctions are not entirely predicated upon the International Emergency Economic Powers Act (IEEPA), which requires exemptions for certain informational materials. See North Korea Sanctions Regulations, 75 Fed. Reg. at 67,912. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW EXPORT CONTROLS 31 title to, and control of, the exported items to the Cuban purchaser.”51 In addition, OFAC updated its list of authorized providers of air, travel, and remittance forwarding services for Cuba eight times during 2010.52 C. IRAN The Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (“CISADA”) was signed into law on July 1, 2010.53 CISADA expanded the Iran Sanctions Act of 1996 (the “ISA”), which gives the President the authority to penalize companies involved in Iran’s energy sector or in certain other activities disfavored under the ISA.54 CISADA also provided for the imposition of certification requirements for federal contractors, authorized U.S. state and local governments to divest their assets from entities that invest in Iran’s energy sector, and required new banking regulations. Under the amended ISA, penalties are available for any person that the President determines has: (i) invested $20 million or more in any 12-month period knowing it would directly and significantly contribute to the development of Iranian petroleum resources; (ii) exported goods, services or technology to Iran knowing that they would materially contribute to Iran’s ability to acquire or develop chemical, nuclear, or biological weapons or advanced conventional weapons; (iii) sold, leased, or otherwise provided to Iran goods, services, technology, information, or support with a value of $1 million, or $5 million over a 12-month period, that could directly or significantly facilitate the maintenance or expansion of Iran’s domestic production of refined petroleum products; (iv) exported or provided to Iran refined petroleum products or goods, services, information, technology, or support with a value of $1 million, or $5 million over a 12-month period, that could directly and significantly contribute to Iran’s ability to import refined petroleum products.55 The penalties that may be assessed against any person determined to have engaged in any of the disfavored activities include: (i) a prohibition of transactions in foreign exchange; (ii) a prohibition of transfers of credit or payments by, through or to any U.S. financial institution that “involve any interest of the sanctioned person;” (iii) a prohibition on the acquisition, transfer, import, export, or other use of any U.S. property “with respect to which the sanctioned person has any interest;” (iv) denial of assistance from the U.S. Export-Import Bank; (v) denial of licenses to export from the United States; (vi) denial of loans or credits from any U.S. financial institution exceeding $10 million in one year; (vii) denial of Federal Reserve primary dealer status or denial of U.S. government funds repository status for financial institutions; (viii) denial of participation in federal 51. Cuban Assets Control Regulations, 75 Fed. Reg. 10,996 (Mar. 10, 2010) (to be codified at 31 C.F.R. pt. 515) (emphasis added) (issued pursuant to pursuant to § 619 of the Omnibus Appropriations Act, 2010). 52. Office of Foreign Assests Control, 2010 OFAC Recent Actions, U.S. DEP’T OF THE TREASURY, http:// www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/ofac-actions-2010.aspx (last visited Feb. 4, 2011). 53. Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, Pub. L. No. 111-195 (2010) (to be codified at 50 U.S.C. § 1701). 54. Pub. L. 104-172 (1996) (as amended, codified at 50 U.S.C. § 1701). 55. See Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, Pub. L. No. 111-195 (2010) (to be codified at 50 U.S.C. § 1701). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 32 THE INTERNATIONAL LAWYER contracting; and (ix) denial of the ability to import goods and services into the United States.56 On October 1, 2010, the U.S. State Department imposed penalties under the ISA, for the first time in the history of the statute, against Naftiran Intertrade Company (“NICO”), a Swiss subsidiary of the National Iranian Oil Company (“NIOC”).57 Later in October, under a “special rule” in the ISA, the President declined to penalize Total, ENI, Royal Dutch Shell, and Statoil because they pledged to end their business in Iran.58 In addition, OFAC issued guidance on August 12, 2010,59 then amended the Iranian Transactions Regulations on September 28, 2010,60 to implement import and export prohibitions of section 103 of CISADA and terminate two general licenses that previously had authorized imports into the United States of, and dealings and services related to, certain foodstuffs and carpets of Iranian origin. Furthermore, the Iranian Transactions Regulations were amended on June 18, 2010, to permit OFAC to expand the list of entities deemed to be “the Government of Iran” to include non-financial entities owned or controlled by Iran.61 In August 2010, OFAC issued a new set of regulations, the Iranian Financial Sanctions Regulations,62 as required under CISADA. The regulations impose restrictions on U.S. “financial institutions”63 that provide correspondent banking services to any non-U.S. financial institutions that may be designated for engaging in certain activities disfavored under the ISA. Financial institutions may be designated for knowingly engaging in: (i) facilitating the Iranian government’s efforts to “acquire or develop weapons of mass destruction” or support terrorism; (ii) facilitating “the activities of a person subject to financial sanctions” under any Iran sanctions resolution of the UN Security Council; (iii) engaging in money laundering or facilitating transactions by Iranian financial institutions related to (i) or (ii); or (iv) providing significant financial services to the Iranian Islamic Revolutionary Guard Corps or its agents or affiliates, or certain blocked Iranian financial institutions.64 CISADA also requires the Treasury Department to issue regulations (without specifying a deadline) that may impose certain additional Iran sanctions-related compliance obligations on financial institutions that provide correspondent banking services from the United States for non-U.S. financial institutions.65 56. See id. 57. See 75 Fed. Reg. 62,916 (Oct. 13, 2010). 58. See James B. Steinberg, Briefing on Iran Sanctions Act Implementation, U.S. DEP’T OF STATE, Sept. 30, 2010, http://www.state.gov/s/d/2010/148479.htm. 59. Office of Foreign Assets Control, Guidance Regarding Import Prohibitions Imposed by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, U.S. DEP’T OF THE TREASURY, (Aug. 12, 2010). 60. Iranian Transactions Regulations, 75 Fed. Reg. 59,611 (Sept. 28, 2010) (to be codified by revoking 31 C.F.R. §§ 560.534-35). 61. Iranian Transactions Regulations, 75 Fed. Reg. 34,630 (June 18, 2010) (to be codified at 31 C.F.R. pt. 560). 62. 75 Fed. Reg. 49,836 (Aug. 16, 2010) (codified in scattered sections of 31 C.F.R. pt. 561). 63. 31 C.F.R. § 561.309 (2011) (defining U.S. financial institutions). 64. 31 C.F.R. § 561.201(a) (2011). 65. Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, Pub. L. No. 111-195, § 104(e) (2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW EXPORT CONTROLS D. PERSONAL COMMUNICATIONS–CUBA, IRAN, AND 33 SUDAN On March 8, 2010, OFAC issued general licenses authorizing the export to Cuba,66 Iran, and Sudan of certain free, publicly available software for personal communication over the Internet (such as instant messaging, email, and social networking), a well as services incidental to the export.67 E. SPECIALLY DESIGNATED NATIONALS OFAC frequently updated the Specially Designated National List under a variety of programs in 2010. Most designations in 2010 were directed toward Global Narcotics Traffickers. F. SUDAN On October 20, 2010, OFAC published a Statement of Licensing Policy establishing a favorable licensing regime for the commercial exportation or reexportation of U.S.-origin agricultural equipment and services to all areas of Sudan (in addition to those areas previously exempted as “Specified Areas”). The Statement of Licensing Policy indicated that OFAC generally would apply the same criteria it uses for agricultural licensing under the Trade Sanctions Reform and Export Enhancement Act of 2000.68 G. TERRORISM On November 23, 2009, OFAC amended the Global Terrorism Sanctions Regulations, imposing blocking requirements against persons who provide certain financial, material, or technological support for terrorist activities.69 Together with a list of examples, these amendments clarified that the provision of financial, material or technological support of terrorism can include the provision of any tangible or intangible property used for that purpose. Also, OFAC released its annual report in March 2010 on the effectiveness of its asset blocking programs in combating international terrorism.70 66. The export or reexport to Cuba of items “subject to the EAR” also must be authorized by the U.S. Department of Commerce. Cuban Assets Control Regulations; Sudanese Sanctions Regulations. 67. Cuban Assets Control Regulations; Sudanese Sanctions Regulations; Iranian Transactions Regulations, 75 Fed. Reg. 10,997 (Mar. 10, 2010) (to be codified at 31 C.F.R. pt. 515, 538, and 560), available at http:// www.treasury.gov/resource-center/Documents/soc_net.pdf. 68. Office of Foreign Assets Control, Statement of Licensing Policy Regarding Agricultural Exports to Sudan, U.S. DEP’T OF THE TREASURY, (Oct. 20, 2010), available at http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/sudan_license_ag.pdf. 69. Global Terrorism Sanctions Regulations, 74 Fed. Reg. 61,036, (Nov. 23, 2009) (to be codified at 31 C.F.R. pt. 594), available at http://www.treasury.gov/resource-center/sanctions/Documents/fr74_61036.pdf. 70. See Office of Foreign Assets Control, Terrorist assets Report: Eighteenth Annual Report to Congress on Assets in the U.S. of Terrorist Countries and International Terrorism Program Designees, U.S. DEP’T OF THE TREASURY, (2009), http://www.treasury.gov/resource-center/sanctions/Documents/tar2009.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 34 THE INTERNATIONAL LAWYER H. OTHER ENFORCEMENT ACTIONS 1. Aviation Services International, B.V. Aviation Services International, B.V., also known as Delta Logistics, B.V. (collectively, “ASI”) settled administrative charges filed by OFAC and BIS arising from ASI’s alleged unlicensed export of aircraft parts and other goods to Iran during 2005-2007.71 ASI agreed to a $100,000 criminal penalty, and accepted a BIS Export Denial Order prohibiting it from exporting any goods from the United States for seven years.72 2. Innospec, Inc. Innospec agreed to pay $2.2 million to settle allegations of violations of the Cuban Assets Control Regulations.73 OFAC’s settlement is part of a $40.2 million comprehensive criminal and civil settlement between Innospec and OFAC, the DOJ, the SEC, and the United Kingdom’s Serious Fraud Office. OFAC alleged that Innospec maintained a sales office in Cuba and conducted business in Cuba, with Cuban power companies, and with financial institutions located in Cuba. Innospec voluntarily disclosed the matter to OFAC. 3. Hilton International Co. Hilton remitted $735,407 to settle alleged violations of the Sudanese Sanctions Regulations.74 Hilton voluntarily disclosed to OFAC the alleged violations, relating to the unauthorized operation of two Hilton-brand hotels in Sudan. 4. Royal Bank of Scotland N.V. / ABN AMRO Bank N.V. In May 2010, the Royal Bank of Scotland N.V. (the renamed ABN AMRO Bank N.V.) agreed to forfeit $500 million and to enter into a deferred prosecution agreement with the DOJ to settle criminal economic sanctions and anti-money laundering charges related to the alleged “stripping” of the details of Iranian and other targeted parties in processing international U.S. dollar funds transfers.75 71. Office of Foreign Assets Control, Enforcement Information for March 9, 2010, U.S. DEP’T OF THE TREA(Mar. 9, 2010), http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/ 03092010.pdf. 72. A $750,000 OFAC civil penalty was deemed satisfied by ASI’s agreement to pay the criminal fine and acceptance of the BIS penalties. Id. 73. Office of Foreign Assets Control, Enforcement Information for March 19, 2010, U.S. DEP’T OF THE TREASURY, (Mar. 19, 2010), http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/03192010.pdf. 74. Office of Foreign Assets Control, Enforcement Information for April 23, 2010, U.S. DEP’T OF THE TREASURY, (Apr. 23, 2010), http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/ 04232010.pdf. 75. Press Release, Office of Public Affairs, U.S. Dep’t of Just., Former ABN Amro Bank N.V. Agrees to Forfeit $500 Million in Connection with Conspiracy to Defraud the United States and with Violation of the Bank Secrecy Act (May 10, 2010), available at http://www.justice.gov/opa/pr/2010/May/10-crm-548.html. SURY, VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW EXPORT CONTROLS 35 5. Agar Corporation In June 2010, Agar Corporation Inc. pled guilty to criminal charges and entered into a settlement with OFAC of civil charges related to indirect exports of goods and services and facilitation of exports to Sudan.76 Agar agreed to pay a criminal fine of $760,000, the forfeiture of $380,000, and a civil penalty of $860,000, for a total of $2 million in penalties. Agar also agreed to implement an expanded sanctions compliance program and to appoint an independent export control auditor. 6. Maersk Line, Limited Maersk Line, Limited, and its subsidiaries Farrell Lines Incorporated and E-Ships, Inc. (collectively, “MLL”) remitted $3,088,400 to settle alleged violations of the Sudanese Sanctions Regulations and the Iranian Transactions Regulations.77 OFAC alleged that MLL provided unlicensed shipping services for 4,714 shipments of cargo originating in or bound for Sudan and Iran. 7. Barclays Bank PLC In August 2010, Barclays Bank PLC settled criminal and civil charges related to the transfer of Iranian funds through the U.S. financial system, which it had voluntarily disclosed.78 Barclays agreed to forfeit $298 million as part of deferred prosecution agreements reached with the DOJ and the New York County District Attorney’s Office.79 Barclays entered into a settlement of civil charges brought by OFAC as well mandating an expanded OFAC compliance program but paid no additional penalties. Barclays allegedly caused its New York branch and other U.S. financial institutions to process transactions for entities targeted by sanctions. According to these documents, they removed or falsified references to these entities in U.S. dollar payment messages to U.S. correspondent banks. I. SIGNIFICANT COURT CASES INVOLVING OFAC PROGRAMS The Ninth Circuit held that the government need not prove that a person charged with violating the Iranian Transactions Regulations was aware of a specific licensing requirement but only that the defendants knew their actions violated the U.S. embargo.80 76. Office of Foreign Assets Control, Enforcement Information for July 15, 2010, U.S. DEP’T OF THE TREA(July 15, 2010), http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/ 07152010.pdf. 77. Office of Foreign Assets Control, Enforcement Information for July 28, 2010, U.S. DEP’T OF THE TREASURY, (July 28, 2010), http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/ 07292010.pdf. 78. Barclays Bank PLC Settles Allegations of Violations of Multiple Sanctions Programs, U.S. DEP’T OF THE TREASURY, Aug. 18, 2010, http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/barclays08182010.pdf. 79. Id. 80. United States v. Mousavi, 604 F.3d 1084, 1093 (9th Cir. 2010). SURY, SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 36 THE INTERNATIONAL LAWYER In The New York Times Company v. U.S. Dep’t of the Treasury, the Southern District of New York granted the Times’ motion for summary judgment pursuant to the Freedom of Information Act to seek the identities of individuals granted an OFAC license.81 VI. Canadian Developments A. STATUTORY AMENDMENTS On July 13, 2010, North Korea joined Myanmar and Belarus on Canada’s Area Control List,82 which requires an export permit under the Export and Import Permits Act for any exports of goods or technology. There were several key developments regarding Canadian sanctions against Iran this year. On June 18, 2010, amendments to the Iran Sanctions Regulations came into force implementing U.N. Security Council Resolution 1929 into Canadian law.83 These included measures in the uranium-mining sector, additions to the list of designated persons, and export bans on certain goods and technology. On July 22, 2010 following similar actions taken by the United States and the European Union, Canada implemented its own sanctions against Iran, adding to the compliance burden of Canadian companies doing business internationally, particularly in the financial services and oil and gas sectors. The new measures, implemented under Canada’s Special Economic Measures Act (SEMA), include prohibitions against new investment in the Iranian oil and gas sector, providing items used in refining oil and gas to Iran, establishing correspondent banking relationships with Iranian financial institutions, and providing or acquiring financial services to allow an Iranian financial institution to be established in Canada or vice-versa.84 Canada also promulgated a relief provision in the Special Economic Measures (Iran) Permit Authorization Order,85 which permits the Canadian Government to grant special permission to export to Iran notwithstanding a prohibition under the SEMA. The following General Export Permits and Regulations are under review: General Export Permit No. 1–Export of Goods for Special and Personal Use Permit; General Export Permit No. 27–Nuclear-Related Dual Use Goods; General Export Permit No. 29–Eligible Industrial Goods; General Export Permit No. 30–Certain Industrial Goods to Eligible Countries and Territories; and Transshipment Regulations.86 81. New York Times Co. v. U.S. Dep’t of the Treasury, No. 09 Civ. 10437 (S.D.N.Y. Oct. 13, 2010). 82. Order Amending the Area Control List, SOR/2010-162 (Can.). 83. Regulations Amending the Regulations Implementing the United Nations Resolutions on Iran, SOR/ 2010-154 (Can.). 84. Special Economic Measures (Iran) Regulations, SOR/2010-165 (Can.). 85. Special Economic Measures (Iran) Permit Authorization Order, SOR/2010-166 (Can.). 86. See Legislation, DEP’T OF FOREIGN AFF. AND INT’L TRADE (Can.), http://www.international.gc.ca/controls-controles/report-rapports/legislation-reglements.aspx (last visited Jan. 23, 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW EXPORT CONTROLS 37 B. CASES/CBSA ENFORCEMENT ACTIONS 1. R. v. Yadegari On July 6, 2010, Mahmoud Yadegari was found guilty on nine of ten charges in relation to the attempted export of pressure transducers to Iran.87 The charges were laid under the Customs Act,88 the United Nations Act,89 the Export and Import Permits Act (“EIPA”),90 the Nuclear Safety and Control Act (“NSCA”)91 and the Criminal Code.92 The pressure transducers (“manometers”) convert pressure measurements into an electrical signal that can be recorded or displayed. The devices have several benign industrial applications but can also be used in uranium enrichment and are controlled under the EIPA and the NSCA. Mr. Yadegari purchased ten transducers from Alpha Controls and Instruments and then tried to export some of them via courier to Iran through Dubai. On July 29, 2010, the Court sentenced Mr. Yadegari to 51 months imprisonment.93 The prosecution was seeking 6.5 years. The case sets an important precedent both in terms of the substantive elements of the charges and the factors considered in sentencing for export-related offenses. 2. Steven and Perinne de Jaray On April 29, 2010, Canada Border Services Agency (CBSA) charged Steven and Perienne de Jaray with exporting 5,100 controlled electronic chips to Hong Kong without a permit and failing to report the export. 3. Kenn Borek Air On November 10, 2010 in the first case of its kind involving Myanmar, the CBSA charged Kenn Borek Air and its former general manager for exporting a de Havilland DHC-6 Twin Otter airplane and 149 aircraft parts without valid export permits.94 C. ADMINISTRATIVE STEPS TOWARDS LIBERALIZING ENCRYPTION CONTROLS After launching consultations in response to business concerns about the competitive impact of its encryption controls, the Export Controls Division of Foreign Affairs and International Trade Canada took some tentative steps towards establishing greater transparency and flexibility in its implementation of these rules. These included publishing 87. See Yadegari Guilty, PUBLIC PROSECUTION SERV. OF CAN., July 6, 2010, http://www.ppsc-sppc.gc.ca/ eng/nws-nvs/comm/2010/06_07_10.html. 88. Customs Act, R.S.C. 1985, c. 1 (2nd Supp.) (Can.). 89. United Nations Act, R.S.C. 1985, c. U-2 (Can.). 90. Export and Import Permits Act, R.S.C. 1985, c. E-19 (Can.). 91. Nuclear Safe and Control Act, S.C. 1997, c. 9 (Can.). 92. Criminal Code, R.S.C. 1985, c. C-46 (Can.). 93. Given certain reductions, the overall sentence is 35.5 months. The prosecution had sought 6.5 years. Sentence in R. v. Yadegari, PUBLIC PROSECUTION SERV. OF CAN., July 6, 2010, http://www.ppsc-sppc.gc.ca/ eng/nws-nvs/comm/2010/29_07_10.html. 94. Charges Laid for Unlawful Export of Goods to Myanmar, CAN. BORDER SERVS. AGENCY, Nov. 10, 2010, http://www.cbsa-asfc.gc.ca/media/prosecutions-poursuites/pra/2010-11-10-eng.html. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 38 THE INTERNATIONAL LAWYER guidelines on obtaining multi-destination permits or cryptographic goods, software, and technology.95 These permits enable exporters to ship or transfer items to consignees in multiple countries under relatively flexible terms and conditions. 95. Permits for Cryptographic Items, FOREIGN AFF. & INT’L TRADE CAN., Oct. 9, 2010, http://www.international.gc.ca/controls-controles/export-exportation/crypto/Broadbased-Elargie.aspx?lang=eng. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Antitrust EDITED BY: SUSANA CABRERA ZARAGOZA, KONSTANTIN JÖRGENS, AND ÁLVARO GONZÁLEZ RODRIGUEZ* AUTHORED BY: BRUNO PEIXOTO, MARK KATZ, JIM DINNING, LUCÍA OJEDA CÁRDENAS, CLAIRE WEBB, AUSRA O. PUMPUTIS, PAUL SCHOFF, JING CHUA, PETER WANG, YIZHE ZHANG, PALLAVI S. SHROFF, ARSHAD PAKU KHAN, HARMAN SANDHU, GUNNAR WOLF, MICHAEL CLANCY, LAURIE-ANNE GRELIER, FRANÇOIS BRUNET, ERIC PAROCHE, SUSANNE ZUEHLKE, JAN PHILIPP KOMOSSA, EYTAN EPSTEIN, TAMAR DOLEV-GREEN, VASSILY RUDOMINO, GERMAN ZAKHAROV, STEPHEN KON, GORDON CHRISTIAN, KAMYA RAJAGOPAL, GAYLE SMITH, HEATHER IRVINE, AND CHRISTOPHER KOK** This article outlines the year’s most important developments in key areas of antitrust enforcement in fourteen selected jurisdictions. Prepared by antitrust law practitioners and the International Antitrust Law Committee, this article summarizes a detailed publication to be released in spring 2011 covering antitrust developments in more than forty jurisdictions worldwide.1 * Garrigues (Spain). ** Bruno Peixoto, Lanna Peixoto Advogados (Brazil); Mark Katz and Jim Dinning, Davies Ward Phillips & Vineberg LLP (Canada); Lucı́a Ojeda Cárdenas, SAI Abogados (Mexico); Claire Webb and Ausra O. Pumputis, Weil, Gotshal & Manges (United States); Paul Schoff and Jing Chua, Minter Ellison (Australia); Peter Wang and Yizhe Zhang, Jones Day (China); Pallavi S. Shroff, Arshad Paku Khan and Harman Sandhu, Amarchand & Mangaldas & Suresh A. Shroff & Co (India); Gunnar Wolf, Michael Clancy and Laurie-Anne Grelier, Covington & Burling (European Union); François Brunet and Eric Paroche, Cleary Gottlieb Steen & Hamilton LLP (France); Susanne Zuehlke and Jan Philipp Komossa, Latham & Watkins (Germany); Eytan Epstein and Tamar Dolev-Green, Epstein, Chomsky, Osnat & Co (Israel); Vassily Rudomino and German Zakharov, Alrud (Russia); Stephen Kon, Gordon Christian, Kamya Rajagopal, and Gayle Smith, SJ Berwin (United Kingdom); Heather Irvine and Christopher Kok, Deneys Reitz (South Africa). 1. This report will be available online at http://www.abanet.org/dch/committee.cfm?com=IC722000. 39 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 40 THE INTERNATIONAL LAWYER Americas I. Brazil A. LEGISLATIVE DEVELOPMENTS The Senate continues to debate a Bill2 approved by the House of Representatives which might substantially change Brazilian antitrust enforcement by merging the antitrust regulatory powers of the Secretariat for Economic Law (“SDE”) and the Secretariat for Economic Monitoring (“SEAE”) into one single antitrust agency, the Administrative Council for Economic Defense (“CADE”). To improve the functioning of its leniency program, SDE issued a new leniency regulation aimed at increasing the procedure’s transparency.3 Among other things, it clarifies the procedures for oral applications and introduces a marker system. B. MERGERS CADE blocked the acquisition of concrete producer CimentoTupi by PolimixConcreto, ordering the parties to unwind the transaction,4 after concluding that the acquisition would result in market shares of up to eighty percent in local markets and would increase the probability of both unilateral effects and coordination. In both Telefónica/Telco/Telecom Italia and Oi/Brasil Telecom, CADE made the approval of the transactions subject to the adoption of behavioral remedies to safeguard competition.5 SEAE issued an economic opinion recommending that CADE require substantial divestitures in order to allow the merger of Brazil’s leading food processors to proceed.6 C. ANTICOMPETITIVE PRACTICES CADE fined five industrial and medical gas manufacturers 2.3 billion reais (approximately US$1.35 billion) for collusion, price-fixing, market division, and bid-rigging,7 after finding that the cartel in question had been active since at least 1998. This fine is the highest one imposed in the history of antitrust enforcement in Brazil. Substantial fines were also imposed on the companies’ executives. 2. See Senado Federal, Projeto de Lei da Câmara nº 6, de 2009 [Legislative Bill from the House of Representatives n. 6 of 2009] (Braz.), available at http://www.senado.gov.br/sf/atividade/Materia/Detalhes.asp?p_ cod_mate=89289. 3. Portaria No. 456, de 15 de Março de 2010, Diaro Oficial Da Uniao [D.O.U.] 50: 28 de 16.3.2010 (Braz.). 4. See generally Conselho Administrativo De Defesa Economica [Admin. Council for Econ. Def.][CADE], Ato de Concentração No. 08012.002467/2008-22 (Oct. 6, 2010), http://www.cade.gov.br/temp/t2812011132 02956.pdf. 5. Conselho Administrativo De Defesa Economica [Admin. Council for Econ. Def.], Ato de Concentração No. 53500.012487/2007 (Apr. 28, 2010), http://www.cade.gov.br/upload/TCD-AC-2007-53500-012487Telefonica-RAGAZZO.pdf. 6. See Secretaria de Acompanhamento Econômico [Secretariat of Econ. Monitoring], Ato de Concentração No. 08012.004423/2009-18, Parecer No.06510/2010/RJ (June 29, 2010), http://www.seae.fazenda. gov.br/destaque/parecer-seae-ac-08012-004423-2009-18-perdigao-e-sadia. 7. Conselho Administrativo De Defesa Economica, Processo Administrativo No. 08012.009888/2003-70 (Sept. 22. 2010), http://www.cade.gov.br/temp/D_D000000555711078.pdf. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST D. ABUSES OF 41 DOMINANCE AmBev has challenged a CADE decision8 imposing a fine of approximately US$200 million for adopting a loyalty program of non-linear pricing and discounts which allegedly induced exclusivity and/or the acquisition of target quantities in the downstream market. AmBev has argued that (i) SDE violated its constitutional and procedural rights during the inspections conducted in the company’s headquarters, and (ii) CADE failed to demonstrate actual harm or negative effects on competition and consumer welfare. A decision is pending. E. COURT DECISIONS The Superior Court of Justice overturned a decision by the Federal Court of Appeals subjecting transactions in the banking and financial industry to antitrust scrutiny.9 A number of recovery actions were filed against steel producers for customer allocation, resale price maintenance and price fixing in the steel rebar market, following a ruling by CADE.10 Associations of construction companies pressed ahead with a collective antitrust action against the steel rebars producers,11 seeking injunctive relief and damages. A major collective action for injunctive relief and damages filed by associations of hospitals against an alleged cartel of suppliers of medical gases12 was resumed in 2010 after a decision by CADE that the defendants engaged in collusion, market division, and bid rigging. II. Canada A. LEGISLATIVE DEVELOPMENTS The most significant development in 2010 was the implementation in March of the new per se conspiracy offense under the Canadian Competition Act (“the Act”).13 The new offense prohibits competitors from entering into agreements that: “(i) fix, maintain, increase or control the price for the supply of a product; (ii) allocate sales, territories, customers or markets for the production or supply of a product; or (iii) fix, maintain, control, prevent, lessen or eliminate the production or supply of a product.”14 The new offense does not require the prosecution to prove that the agreement in question had an undue impact on competition or resulted in an unreasonable increase in prices. 8. TRF-1, Ap. No. 2009.34.00.028766-7, Relator: 09.02.2009, REVISTA DO TRIBUNAL REGIONAL FED[R.T.R.F.] (Braz.). 9. See S.T.F., No. 2008/0173677-1, Relatora: Eliana Calmon, 25.8.2010, R.T.J. (Braz.), available at https://ww2.stj.jus.br/processo/jsp/livrao/mainPage.jsp?seqiteor=915164. 10. See Conselho Administrativo De Defesa Economico, Processo Administrativo No. 08012.004086/200021 (Sept. 5, 2005) (Braz.), available at http://www.cade.gov.br/temp/D_D000000137611642.pdf. 11. TRF-1, No. 2009.34.00.035755-7, Relator: 21.10.2009, REVISTA DO TRIBUNAL REGIONAL FEDERAL [R.T.R.F.] (Braz.). 12. TRF-1, No. 002409709934-5, Relator: 19.01.2010, REVISTA DO TRIBUNAL REGIONAL FEDERAL [R.T.R.F.] (Braz.), available at http://www.tjmg.jus.br/juridico/sf/proc_resultado.jsp?listaProcessos=09709934 &comrCodigo=24&numero=1. 13. Budget Implementation Act, 2009, S.C., c. 2, s. 45 (Can.). 14. Id. ERAL SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 42 THE INTERNATIONAL LAWYER Maximum penalties are now fourteen years of imprisonment and a CDN$25 million (approximately US$25 million) fine per count, up from the previous maximums of five years and CDN$10 million (approximately US$10 million) per count.15 Liability can be avoided under the new offense if it can be established that: (i) the impugned agreement is “ancillary to a broader or separate agreement that includes the same parties;” (ii) the impugned agreement is “directly related to, and reasonably necessary for giving effect to, the objective of that broader or separate agreement;” and (iii) the “broader or separate agreement, considered alone, does not contravene” the conspiracy offense.16 The Act also now contains a new civil provision that applies to agreements between competitors that have the effect of lessening or preventing competition substantially. Applications under this new provision are brought by the Commissioner of Competition to the Competition Tribunal. Relief is limited to an order requiring the parties to cease engaging in the impugned conduct or, on consent, to taking any other action. B. MERGERS The Competition Bureau (“the Bureau”) secured divestitures from a number of merging parties in 2010. For example, in June 2010, the Bureau announced that it reached an agreement with IESI-BFC Ltd. and Waste Services Inc. requiring divestitures of commercial waste collection assets of Waste Services Inc. in five Canadian cities as a condition for obtaining approval of the proposed merger.17 Divestitures were also secured by the Bureau in a number of international mergers, including: Ticketmaster/Live Nation,18 Nufarm/A.H. Marks,19 Teva/Ratiopharm,20 Novartis/Alcon,21 and The Coca-Cola Company’s acquisition of the North American business of its primary bottler, Coca-Cola Enterprises Inc.22 15. Budget Implementation Act, s. 45. 16. Budget Implementation Act, s. 90.1. 17. Press Release, Can. Competition Bureau, Competition Bureau Requires Significant Divestitures in Waste Services Merger (June 29, 2010), available at http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/ eng/03256.html. 18. Press Release, Can. Competition Bureau, Competition Bureau Requires Divestitures by TicketmasterLive Nation to Promote Competition (Jan. 25, 2010), available at http://www.competitionbureau.gc.ca/eic/ site/cb-bc.nsf/eng/03191.html. 19. Press Release, Can. Competition Bureau, Competition Bureau Requires Divestitures in Herbicide Merge (July 28, 2010), available at http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03264.html. 20. Press Release, Can. Competition Bureau, Competition Bureau Requires Divestitures in Teva/ratiopharm Merger (July 30, 2010), available at http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/ 03271.html. 21. Press Release, Can. Competition Bureau, Competition Bureau Secures Divestitures in Novartis’ Acquisition of Alcon (Aug. 9, 2010), available at http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03274. html. 22. Press Release, Can. Competition Bureau, Competition Bureau Requires Remedy in Coca-Cola Acquisition (Sept. 27, 2010), available at http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03290.html. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST 43 III. Mexico A. LEGISLATIVE DEVELOPMENTS A Bill implementing the amendments to the Constitution regarding class actions was published. If enacted, it will modify various provisions of the Federal Code on Civil Procedures and the Federal Law on Economic Competition.23 Additionally, the Mexican President submitted a bill to Congress to, among other matters, increase the amount of fines imposed for antitrust infringements, introduce criminal liability for cartel activity, provide for the possibility of applying interim measures, facilitate the inspection procedure, and provide for a more detailed regulation on joint dominance. The Bill requires the approval of both the House of Representatives and the Senate.24 B. MERGERS The Federal Competition Commission (“the FCC”) authorized the acquisition by the Mexican broadcasting company Televisa of thirty to forty percent of Nextel’s shares, as well as the indirect acquisition by AméricaMóvil of 71.5% of Teléfonos de México’s voting shares, and up to 100% of TelmexInternacional’s shares.25 It also authorized the Cydsa/ Mexichem merger in the PVC market, subject to conditions.26 C. ANTICOMPETITIVE PRACTICES Four investigations were initiated in relation to the following markets: tortilla, freight services, air tickets, and flexible transmission means of alternating power sources.27 23. De La Comisión De Puntos Constitucionales, Con Proyecto De Decreto Por El Que Se Adiciona Un Párrafo Tercero Y Se Recorre El Orden De Los Párrafos Subsecuentes Del Artı́culo 17 De La Constitución Polı́tica De Los Estados Unidos Mexicanos Gaceta Parlamentaria, Cámara de Diputados No. 2976-IV, Mar. 25, 2010 (Mex.), available at http://gaceta.diputados.gob.mx/Gaceta/61/2010/mar/20100325-IV.html. 24. President Felipe Calderon, Decreto Por El Que Se Reforman, Adicionan Y Derogan Diversas Disposiciones dela Ley Federal de Competencia Economica [Decree Amending, Supplementing and Repealing various Provisions of the Federal Law Economic Competition], Gaceta Parlamentaria, Cámara de Diputados No. 2976-IV, Apr. 6, 2010 (Mex.), http://www.cfc.gob.mx/images/stories/Noticias/iniciativa%20presidencial%20 lfce.pdf. 25. Press Release, Comision Federal de Competencia [Fed. Competition Comm’n], Aprueba CFC Concentraciones Televisa-Nextel y Telmex-TelCel [Approval of CFC-Nextel Merger Televisa and Telmex-Telcel ] (Feb. 11, 2010), available at http://www.cfc.gob.mx/images/stories/Noticias/Comunicados/3.-concentracionestelevisa-nextelytelmex-telcel.pdf. 26. Press Release, Comision Federal de Competencia, Impone CFC Condiciones a la Concentracion de Mexichem Con Subsidiarias de Cydsa (Aug. 24, 2010), available at http://www.cfc.gob.mx/index.php/ COMUNICADOS/comunicados-2010.html. 27. See generally Extracto Del Acuerdo por el que la Comisión Federal de Competencia Inicia La Investigación por Denuncia Identificada Bajo el Número de Expediente DE-014-2010, por la Posible Comisión de Prácticas Monopólicas Absolutas en el Mercado de la Producción, Distribución y Comercialización de Masa y Tortillas de Maı́z en el Municipio de Tuxtla Gutiérrez, Chiapas [Extract Agreement Federal Competition Commission Initiated the Investigation on Complaints Identified Under the File Number DE-014-2010, for the Commission of Absolute Monopolistic Practices in the Market Production, Distribution, and Marketing of Masa and Tortillas Corn in the Municipality of Tuxtla Gutierrez, Chiapas] Diaro Oficial de la Federacion [D.O.], 28 de Julio 2010 (Mex.); Presidencia y Secretaria Ejecutiva, Comision Federal de Competencia, SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 44 THE INTERNATIONAL LAWYER The FCC confirmed the decision finding pharmaceutical companies liable for bid rigging regarding the sale of insulin to a public Mexican Healthcare Institution28 and the imposition of fines on PCTV shareholders for refusing to provide acquired TV signals to its competitors and dividing up markets by allocating territories.29 D. ABUSES OF DOMINANCE Seven investigations were initiated in relation to: home improvement products, airport services, beer, home furniture, advertising spaces regarding the marketing of real estate, local and domestic long-distance dedicated access services to carriers, and exported guava markets.30 The FCC reduced the fine imposed on Televisa in its decision of November Deschamiento por Expediente No. DE-020-2010 (Oct. 6., 2010); Extracto Del Acuerdo por el que la Comisión Federal de Competencia Inicia La Investigación por Denuncia Identificada Bajo el Número de Expediente DE-004-2010, por la Posible Comisión de Prácticas Monopólicas Absolutas en el Mercado de Prestación, Producción, Distribución y Comercialización de Insumos y Servicios para la Reserva y Venta de Boletos de Transporte Aéreo de Pasajeros en el Territorio Nacional [Extract of the Agreement by Which the Federal Competition Commission Initiated Complaint Investigation Identified Under the File Number DE004-2010, for the Commission of Absolute Monopolistic Practices in the Market for the Provision, Production, Distribution, and Marketing of Inputs and Services for Booking and Ticketing of Air Travel in the Country], Diaro Oficial de la Federacion [D.O.], 13 de Mayo 2010 (Mex.); Extracto del Acuerdo por el que la Comisión Federal de Competencia inicia la investigación de oficio identificada bajo el número de expediente IO-002-2010, por la posible comisión de prácticas monopólicas absolutas en el mercado de la producción, procesamiento, distribución y comercialización de sistemas flexibles de transmisión de corriente alterna en el territorio nacional [Extract of the Agreement by Which the Federal Competition Commission Began an Official Investigation Identified Under the File Number IO-002-2010, for the Commission of Absolute Monopolistic Practices in the Market for the Production, Processing, Distribution, and Marketing Systems Flexible Alternating Current Transmission in the Country], Diaro Oficial de la Federacion [D.O.], 19 de Febrero 2010 (Mex.). 28. Press Release, Comision Federal de Competencia, Confirma CFC Multa de 150 Millones de Pesos a Empresas Farmaceuticas Por Colusion Contra el IMSS [CFC Confirms Fine of 150 Million Dollars to Pharmaceutical Companies for Collusion Against the IMSS] (June 23, 2010), available at http://www.cfc.gob.mx/ index.php/COMUNICADOS/comunicados-2010.html. 29. Comision Federal de Competencia, Resumen Expediente [Summary Record] No. DE-001-2006-I (Mex.), available at http://resoluciones.cfc.gob.mx/Docs/Asuntos%20Juridicos/V35/21/1331180.pdf. 30. See generally Extracto Del Acuerdo por el que la Comisión Federal de Competencia Inicia La Investigación por Denuncia Identificada Bajo el Número de Expediente DE-013-2010,por Prácticas Monopólicas Relativas Previstas en las Fracciones VIII y XI del Artı́culo 10 de la Ley Federal de Competencia Económica, en el Mercado de la Venta o Comercialización de Productos para la Mejora del Hogar en Tiendas de Autoservicio [Extract of the Agreement by Which the Federal Competition Commission Initiated Complaint Investigation Identified Under the File Number DE-013-2010, for Monopolistic Practices Provided in Sections VIII and XI of Article 10 of the Federal Law of Economic Competition in the Market for the Sale or Marketing of Products for the Home Improvement Stores], Diaro Oficial de la Federacion [D.O.], 9 de Augusto 2010 (Mex.); Extracto del Acuerdo por el que la Comisión Federal de Competencia inicia la investigación por denuncia identificada bajo el número de expediente DE-011-2010, por Prácticas Monopólicas Relativas Previstas en las Fracciones V y X del Artı́culo 10 de la Ley Federal de Competencia Económica, en los Mercados de la Prestación de Servicios Aeroportuarios y Complementarios, ası́ omo el de la Asignación de horarios de Despegue y Aterrizaje, en el Aeropuerto Internacional de la Ciudad de México [Extract of the Agreement by Which the Federal Competition Commission Initiated Complaint Investigation Identified Under the File Number DE-011-2010, for Monopolistic Practices Provided in Sections V and X of Article 10 of the Federal Law of Economic Competition in the Markets for the Provision of Airport Services and Complementary, and the Allocation of Takeoff and Landing Times at the International Airport of Mexico City], Diaro Oficial de la Federacion [D.O.], 18 de Augusto 2010 (Mex.); Extracto del Acuerdo por el que la Comisión Federal de Competencia inicia la Investigación por Denuncia Identificada Bajo el número de expediente VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST 45 2009 for the refusal to supply its open TV signals.31 In January, the FCC declared that TELCEL was an economic agent with significant market power in the national mobile telephone market.32 DE-012-2010, por Prácticas Monopólicas Relativas Previstas en las Fracciones VIII y XI del Artı́culo 10 de la Ley Federal de Competencia Económica, en los Mercados de Servicios de Distribución, Comercialización y Venta de Bebidas Normalmente Conocidas como Cervezas [Extract of the Agreement by Which the Federal Competition Commission Initiated Complaint Investigation Identified Under the File Number DE-0122010, for Monopolistic Practices Provided in Sections VIII and XI of Article 10 of the Federal Law of Economic Competition in the Markets for Distribution Services, Marketing and Sale of Beverages Commonly Known as Beer] Diaro Oficial de la Federacion [D.O.], 9 de Augusto 2010 (Mex.); Extracto del Acuerdo por el que la Comisión Federal de Competencia Inicia la Investigación por Denuncia Identificada Bajo el Número de Expediente DE-015-2010, por Prácticas Monopólicas Relativas Previstas en las Fracciones II, VIII y XI del artı́culo 10 de la Ley Federal de Competencia Económica, en el Mercado de la Proveedurı́a o Comercialización de Muebles para el Hogar en la Región del Estado de Jalisco [Extract of the Agreement by Which the Federal Competition Commission Initiated Complaint Investigation Identified Under the File Number DE015-2010, for Monopolistic Practices Under Sections II, VIII and XI of Article 10 of the Federal Competition Law Economic, Market, or Marketing proveedurı́a Home Furnishings in the Region of the State of Jalisco], Diaro Oficial de la Federacion [D.O.], 18 de Augusto 2010 (Mex.); Extracto del Acuerdo por el que la Comisión Federal de Competencia inicia la investigación por denuncia Identificada Bajo el Número de Expediente DE-01-2010, por prácticas monopólicas Relativas Previstas en las Fracciones V y VI del artı́culo 10 de la Ley Federal de Competencia Económica, en los Mercados de la Venta de Espacios de Publicidad para la Comercialización de Bienes Inmuebles en Revistas y de los Sistemas de Listados Múltiples Electrónicos de Bienes Inmuebles Disponibles para su Comercialización [Extract of the Agreement by Which the Federal Competition Commission Initiated Complaint Investigation Identified Under the File Number DE-01-2010, for Monopolistic Practices Provided in Sections V and VI of Article 10 of the Federal Law of Economic Competition in the Markets for the Sale of Advertising Space for the marketing of Real Estate Magazines and Electronic Systems for Multiple Listings of Property Available for Sale], Diaro Oficial de la Federacion [D.O.], 26 de Marzo 2010 (Mex.); Extracto del Acuerdo por el que la Comisión Federal de Competencia Inicia la Investigación por Denuncia Identificada Bajo el Número de Expediente DE-008-2010, por Prácticas Monopólicas Relativas Previstas en las Fracciones V, X y XI del artı́culo 10 de la Ley Federal de Competencia Económica, en los Mercados de Servicios Mayoristas de Arrendamiento de enlaces Dedicados locales y de Larga Distancia Nacional. [Extract of the Agreement by Which the Federal Competition Commission Initiated Complaint Investigation Identified Under the File Number DE-008-2010, for Monopolistic Practices Provided in Sections V, X and XI of Article 10 of the Federal Competition Law Economic Markets Wholesale Leasing Services Dedicated Links Local and Domestic Long Distance], Diaro Oficial de la Federacion [D.O.], 29 de Abril de 2010 (Mex.); Extracto del Acuerdo por el que la Comisión Federal de Competencia Inicia la Investigación de Oficio Identificada Bajo el Número de Expediente IO-006-2009, por Prácticas Monopólicas Relativas Previstas en las Fracciones I, II, III, IV, V y X del Artı́culo 10 de la Ley Federal de Competencia Económica, en el Mercado de la Producción, Distribución y Comercialización de Guayabas de Exportación [Extract of the Agreement by Which the Federal Competition Commission Began an Official Investigation Identified Under the File Number IO-006-2009, Provided by Monopolistic Practices in Sections I, II, III, IV, V and X of Article 10 of the Federal Law on Economic Competition in the Market Production, Distribution, and Marketing of Export Guavas], Diaro Oficial de la Federacion [D.O.], 18 de Enero de 2010 (Mex.). 31. Comision Federal de Competencia, Recurso de Reconsideracion Expediente No. RA-003-2010 [Reconsideration Appeal Record No. RA-003-2010], available at http://www.cfc.gob.mx/index.php/RESOLUCIONES-Y-OPINIONES/buscador-de-resoluciones-y-opiniones-de-la-cfc.html. 32. Press Release, Comision Federal de Competencia, Confirma La CFC Dominancia de Telcel en el Mercado Final de Telefonia Movil [The CFC Confirms Telcel Dominance in Final Mobile Phone Market] (Feb. 2, 2010), available at http://68.178.170.101/images/stories/Noticias/Comunicados/2.dominanciaentelefonia movil.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 46 E. THE INTERNATIONAL LAWYER COURT DECISIONS The Supreme Court granted constitutional relief to Coca Cola FEMSA against the FCC resolution finding it liable for exclusionary conduct.33 The FCC was ordered to issue a new resolution taking into account evidence put forward by the defendant that was not properly admitted and assessed in the previous proceeding.34 IV. United States A. ADMINISTRATIVE DEVELOPMENTS The Department of Justice (“DOJ”), Antitrust Division and the Federal Trade Commission (“FTC,” together the “Agencies”) jointly released Revised Merger Guidelines35 to reflect actual practices. The FTC also released a study36 demonstrating the costs of “pay-for-delay” agreements between pharmaceutical companies and continues to urge Congress37 to enact legislation to limit this practice that delays entry of generic versions of branded drugs, especially in the face of continuing setbacks in court.38 B. MERGERS This year, an increasing number of mergers played out in the bankruptcy context,39 the Agencies continued to challenge several consummated mergers,40 and international coor33. Suprema Corte de Justicia, Practicas Monopolicas: Casa Coca Cola FEMSA y Otras, CRONICAS DEL PLENO SALAS (2010), http://www.scjn.gob.mx/Micrositios/unidadcronicas/Sinopsis%20de%20Asuntos%20 destacados%20de%20las%20Salas/1S-090610-JRCD-2127.pdf. 34. Id. 35. Press Release, Fed. Trade Comm’n, Federal Trade Commission and U.S. Department of Justice Issue Revised Horizontal Merger Guidelines (Aug. 19, 2010), available at http://www.ftc.gov/opa/2010/08/ hmg.shtm. 36. Pay for Delay: How Drug Company Pay-Offs Cost Consumers Billions, FED. TRADE COMM’N, 1 (2010), http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf. 37. Press Release, Fed. Trade Comm’n, FTC Testimony: Stopping “Pay-for-Delay” Drug Settlement Agreements is a Top Competition Priority (July 7, 2010), available at http://www.ftc.gov/opa/2010/07/ antitrust.shtm. 38. Arkansas Carpenters Health v. Bayer AG, 604 F.3d 98, 108 (2d Cir. 2010), reh’g denied, 604 F.3d 98 (2d Cir. 2010) (holding Cipro reverse settlement did not violate antitrust laws; both DOJ and FTC submitted amicus briefs urging a rehearing en banc). 39. Press Release, Fed. Trade Comm’n, Fidelity National Financial Settles FTC Charges that its Acquisition of LandAmerica Subsidiaries Reduced Competition in Title Information Markets (July 16, 2010), available at http://www.ftc.gov/opa/2010/07/fidelity.shtm; Press Release, Fed. Trade Comm’n, FTC Order Requires Tops Markets to Sell Seven Penn Traffic Supermarkets (Aug. 4, 2010), available at http://www.ftc. gov/opa/2010/08/tops.shtm; Press Release, Fed. Trade Comm’n, FTC Requires Conditions for Pilot Corporation’s Takeover of Flying J Inc.’s Travel Center Business (June 30, 2010), available at http://www.ftc.gov/ opa/2010/06/flying.shtm. 40. See, e.g., In re Polypore, 2010 WL 866178 (F.T.C.), aff’d 2010 WL 5132519 (F.T.C.) (Administrative Law Judge ruled in favor of FTC’s 2008 complaint that Polypore’s acquisition of rival battery separator manufacturer violated antitrust law); Press Release, Fed. Trade Comm’n, FTC Order Restores Competition in U.S. Markets for Herbicide Products (July 28, 2010), available at http://www.ftc.gov/opa/2010/07/ nufarm.shtm; Press Release, Fed. Trade Comm’n, Houghton International Agrees to Sell Aluminum Production Assets to Settle Charges That 2008 Acquisition of Stuart was Anticompetitive (July 14, 2010), available at Y DE LAS VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST 47 dination facilitated the efficient resolution of mergers affecting multiple jurisdictions.41 Two mergers42 also required behavioral remedies, despite the Agencies’ preference for structural remedies. Google/AdMob was cleared without conditions.43 The FTC continues to challenge44 Ovation Pharmaceutical’s January 2006 acquisition of the drug NeoProfen despite a district court decision that the merger was not anticompetitive because the drugs were not in the same product market.45 C. ANTICOMPETITIVE PRACTICES Although criminal enforcement was not as dramatic as last year, the DOJ succeeded for the first time in extraditing a foreign defendant on antitrust charges.46 In civil enforcement, health care remains a priority.47 The DOJ also revived its scrutiny of the payment cards industry, challenging merchant rules imposed by American Express, Visa, and MasterCard.48 The FTC charged U-Haul with violating Section 5 of the FTC Act by inviting Budget to fix prices on truck rentals, even though no agreement had been reached.49 D. ABUSES OF DOMINANCE The FTC settled charges against Intel for allegedly engaging in “anticompetitive tactics to cut off rivals’ access to the marketplace” in violation of Section 5 of the FTC Act.50 http://www.ftc.gov/opa/2010/07/houghton.shtm; Press Release, Fed. Trade Comm’n, FTC Challenges LabCorp’s Acquisition of Rival Clinical Laboratory Testing Company (Dec. 1, 2010), available at http://ftc. gov/opa/2010/12/labcorp.shtm. 41. Press Release, Dep’t of Just., Justice Department Will Not Challenge Cisco’s Acquisition of Tandberg (Mar. 29, 2010), available at http://www.justice.gov/atr/public/press_releases/2010/257173.htm; Press Release, Fed. Trade Comm’n, FTC Order Protects Consumers in U.S. Market for Eye Care Drug Used in Cataract Surgery (Aug. 16, 2010), available at http://www.ftc.gov/opa/2010/08/novartis.shtm. 42. Press Release, Dep’t of Just., Justice Department Requires Ticketmaster Entertainment Inc. to Make Significant Changes to its Merger With Live Nation Inc. (Jan. 25, 2010), available at http://www.justice.gov/ atr/public/press_releases/2010/254540.pdf; Press Release, Fed. Trade Comm’n, FTC Puts Conditions on PepsiCo’s $7.8 Billion Acquisition of Two Largest Bottlers and Distributors (Feb. 26, 2010), available at http:/ /www.ftc.gov/opa/2010/02/pepsi.shtm. 43. Press Release, Fed. Trade Comm’n, FTC Closes its Investigation of Google AdMob Deal (May 21, 2010), available at http://www.ftc.gov/opa/2010/05/ggladmob.shtm. 44. Notice of Appeal, FTC v. Lundbeck, Inc., No. 08-6379 (D. Minn. Oct. 28, 2010), available at http:// www.ftc.gov/os/caselist/0810156/101028ovationpharmnotice.pdf. 45. FTC v. Lundbeck, Inc., 2010 WL 3810015 (D. Minn. Aug. 31, 2010). 46. Jane Croft, Executive Finally Extradited to US, FIN. TIMES, Mar. 24, 2010, http://www.ft.com/cms/s/0/ 68dbe8ee-36e5-11df-bc0f-00144feabdc0.html. 47. See Press Release, Dep’t of Just., Justice Department Files Antitrust Lawsuit Against Blue Cross Blue Shield of Michigan (Oct. 18, 2010), available at http://www.justice.gov/atr/public/press_releases/2010/ 263227.pdf. 48. Press Release, Dep’t of Just., Justice Department Sues American Express, MasterCard and Visa to Eliminate Rules Restricting Price Competition; Reaches Settlement with Visa and MasterCard (Oct. 4, 2010), available at http://www.justice.gov/atr/public/press_releases/2010/262867.pdf. 49. Press Release, Fed. Trade Comm’n, U-Haul and Its Parent Company Settle FTC Charges That They Invited Competitors to Fix Prices on Truck Rentals (June 9, 2010), available at http://www.ftc.gov/opa/2010/ 06/uhaul.shtm. 50. Press Release, Fed. Trade Comm’n, FTC Settles Charges of Anticompetitive Conduct Against Intel (Aug. 4, 2010), available at http://www.ftc.gov/opa/2010/08/intel.shtm. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 48 E. THE INTERNATIONAL LAWYER COURT DECISIONS The Supreme Court decided two important antitrust cases. In American Needle v. National Football League, the Court refused to treat a joint venture as a single entity immune from violating Section 1 of Sherman Act.51 In Stolt-Nielsen SA et al. v. Animalfeeds International, the Court held that class arbitration proceedings against several shipping companies could not proceed when the arbitration agreements were silent as to class arbitration.52 Asia/Pacific V. Australia A. MERGERS In 2010, the Australian Competition and Consumer Commission (“ACCC”) indicated that its focus would be on mergers that directly affect “consumer’s hip pockets,” particularly in industries like petrol and telecommunications. Since December 2009, it has publicly opposed five mergers.53 B. ANTICOMPETITIVE PRACTICES The ACCC continues to take action against airlines in the air cargo industry, bringing proceedings against Korean Air Lines, Malaysian Airline System, Malaysia Airlines Cargo, Japan Airlines, and Air New Zealand. The ACCC has brought fifteen proceedings against airlines, six of which have settled.54 Significant financial penalties for cartel conduct, ranging from $1 million (approximately US$990,000) to $9.2 million (approximately US$9.1 million), were imposed in four other proceedings.55 C. ABUSES OF DOMINANCE Two companies, Baxter Healthcare56 and Cabcharge Australia Limited,57 were required to pay penalties of $8.5 million (approximately US $8.3 million) and $15 million (approximately US$14.8 million), respectively, for their misuse of market power. The Cabcharge 51. Am. Needle, Inc. v. Nat’l Football League, 130 S. Ct. 2201, 2206-07 (2010). 52. Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 130 S. Ct. 1758, 1775 (2010). 53. The ACCC opposed Breville Group’s proposed acquisition of GUD Holdings, Caltex Australia’s proposed acquisition of Mobil Oil Australia’s retail assets, Cargill Australia’s proposed acquisition of Goodman Fielder’s edible fats and oils business, Link Market Services’ proposed acquisition of Newreg, and National Australia Bank’s proposed acquisition of AXA Asia Pacific Holdings. 54. Proceedings involving Société Air France, KoninklijkeLuchtvaartMaatschappij, Martinair Holland, Qantas, and British Airways have settled. Proceedings against Singapore Airlines Cargo, Cathay Pacific Airways, Emirates, PT Garuda Indonesia, and Thai Airways International remain active. 55. APRIL Fine Paper Trading and a related company, DRS C3 Systems, four, foreign-based suppliers of marine hose, and penalties were imposed on seventeen companies and twenty-two individuals involved in an air conditioning cartel. 56. ACCCOUNT: A Report of the Australian Competition and Consumer Commission’s Activities, AUSTRALIAN COMPETITION & CONSUMER COMM’N, 1 (2010). 57. Press Release, Australian Competition & Consumer Comm’n, Cabcharge Penalized for Misuse of Market Power (Sept. 24, 2010), available at http://www.accc.gov.au/content/index.phtml/itemId/948779. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST 49 penalty is the highest imposed in misuse of market power proceedings brought by the ACCC and was based, in part, on the first application of higher penalties which apply to conduct engaged in after January 1, 2007. VI. China A. LEGISLATIVE DEVELOPMENTS Over the last year, several implementing regulations and guidelines have been issued to address: (i) procedural rules for non-merger investigations;58 (ii) turnover calculation in the review of mergers between financial enterprises;59 (iii) market definition;60 and (iv) merger control rules regarding notification,61 review,62 and remedies.63 B. MERGERS The Ministry of Commerce (“MOFCOM”), which is responsible for merger control, handled more than 140 pre-merger notifications through June 2010,64 with one third entering second phase review and five percent ultimately being either prohibited or given conditional clearance. Beyond the statutory review periods, MOFCOM often requires additional information before accepting the filing and starting the initial waiting period. Most cases take three months from initial filing to clearance, but more difficult ones have taken over nine months. MOFCOM has blocked one transaction, Coca-Cola’s proposed acquisition of Huiyuan,65 and has conditionally approved six others: InBev-Anheuser-Busch, MitsubishiLucite, GM-Delphi, Pfizer-Wyeth, Panasonic-Sanyo, and Novartis-Alcon. These seven published MOFCOM merger decisions demonstrate increasing transparency but reflect an emphasis on market shares and a somewhat skeptical view of vertical relationships. 58. Industrial and Commercial Administrative Organs to Investigate Monopoly Agreements, Abuse of Dominant Position Cases, Procedures, STATE ADMIN. FOR INDUS. & COMMERCE OF THE PEOPLE’S REPUBLIC OF CHINA, 2009, http://www.saic.gov.cn/zwgk/zyfb/qt/fld/200906/t20090605_61123.html. 59. Ministry of Commerce of the P.R.C People’s Bank of China Banking Regulatory Commission, China Securities Regulatory Commission China Insurance Regulatory Commission Order No. 10 of 2009 (Ministry of Commerce of the P.R.C, July 21, 2009) (CHINA), available at http://fldj.mofcom.gov.cn/aarticle/c/ 200907/20090706411691.html. 60. State Anti-Monopoly Comm. on the Definition of Relevant Market Guide, ANTI-MONOPOLY COMM. (promulgated May 24, 2009), http://www.gov.cn/zwhd/2009-07/07/content_1355288.htm. 61. Measures Declaration of Business Concentration (promulgated by the MINISTRY OF COMMERCE OF THE P.R.C.: Anti-monopoly Bureau July 15, 2009, effective Jan. 1, 2010) (China), http://fldj.mofcom.gov.cn/ aarticle/c/200911/20091106639149.html. 62. Examination of Concentration of Business Operators (promulgated by the MINISTRY OF COMMERCE OF THE P.R.C.: ANTI-MONOPOLY BUREAU, July 15, 2009, effective Jan. 1, 2010) (China) http://fldj.mofcom. gov.cn/aarticle/c/200911/20091106639145.html. 63. MINISTRY OF COMMERCE OF THE P.R.C.: ANTI-MONOPOLY BUREAU, Ministry of Commerce Notice No. 41 of 2010 on the Implementation of the Concentration of Assets or Business Operations of the Interim Provisions Stripping (2010), http://fldj.mofcom.gov.cn/aarticle/c/201007/20100707012000.html. 64. MINISTRY OF COMMERCE OF THE P.R.C., Anti-Monopoly Ministry of Commerce held a press conference (Aug. 8, 2010), http://www.mofcom.gov.cn/aarticle/ae/ai/201008/20100807078063.html. 65. Ministry of Commerce of the People’s Republic of China, Ministry of Commerce to Review the Decision on the Prohibition of the Coca Cola’s Acquisition of Huiyuan Firm, http://fldj.mofcom.gov.cn/aarticle/ ztxx/200903/20090306108494.html. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 50 C. THE INTERNATIONAL LAWYER ANTICOMPETITIVE PRACTICES The National Development and Reform Commission (“NDRC”), which is responsible for price-related conduct, announced enforcement actions against several cartels during 2010, including: (i) rice noodle producers;66 (ii) green bean distributors;67 and (iii) a trade association for requiring local companies to offer refrigeration services to garlic distributors at a fixed price. These resulted in fines of between RMB20,000 (approximately US$3,000) and RMB1 million (approximately US$150,000).68 Although the cases were brought under the earlier Price Law, they also shed light on likely cartel enforcement trends under the Anti-Monopoly Law (“AML”). D. COURT DECISIONS The courts have accepted over ten civil AML cases so far.69 Nearly all cases involved allegations of abuse of a dominant market position. One-third were settled, while the others were unsuccessful, mainly due to insufficient evidence. VII. India A. LEGISLATIVE DEVELOPMENTS The Competition (Amendment) Ordinance, 2009 and the Competition (Amendment) Act, 2009,70 dissolved the Monopolies and Restrictive Trade Practices (“MRTP”) Commission, bringing an end to the delayed repeal of the MRTP Commission provided for in the Competition Act, 2002 (“Competition Act”). All cases pending before it are to be transferred either the Competition Appellate Tribunal (“COMPAT”) or the National Commission established under the Consumer (Protection) Act, 1986, depending on the subject matter. B. MERGERS The merger control provisions are not yet in force. However, certain unofficial reports indicate that they may become effective shortly. Further, the existing provisions may be modified to: (i) increase the existing turnover thresholds; (ii) add additional thresholds 66. Nat’l Dev. & Reform Comm’n, Interview with the Person in Charge of the National Development and Reform Commission, available at http://www.sdpc.gov.cn/xwfb/t20100330_338105.htm (discussing collusion on prices of rice in parts of Guangxi, Quan). 67. Nat’l Dev. & Reform Comm’n, Interview with the Person in Charge of Strengthening the Supervision of Agricultural Markets in Quan, available at http://www.sdpc.gov.cn/xwfb/t20100701_358444.htm. 68. Peter Wang et al., Antitrust Alert: Chinese Pricing Enforcers Impose Higher Fines as New Rules Proposed, JONES DAY, July 2010, http://www.jonesday.com/antitrust-alert—chinese-pricing-enforcers-impose-higherfines-as-new-rules-proposed-07-21-2010/. 69. Wang Doudou, Ten Civil Cases Initiated During the First Two Years, LEGAL DAILY (Aug. 30, 2010) http:// www.legaldaily.com.cn/index_article/content/2010-08/30/content_2264422.htm?node=5955. 70. The MRTP Act was repealed effective September 1, 2009 and MRTP Commission was dissolved effective October 14, 2010. Pallavi Shroff & Harman Sandhu, Competition Commission of India’s Trysts with Law and Policy: Enforcement One Year On, COMPETITION POL’Y INT’L, Dec. 16, 2010, https://www.competitionpolicyinternational.com/competition-commission-of-india-s-trysts-with-law-and-policy-enforcement-one-year-on/ . VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST 51 regarding the size of the target; and (iii) reduce the time for reaching a clearance decision to a maximum of 180 days. C. COURT DECISIONS 1. Competition Commission v. Steel Authority71 In its first decision on the Competition Act, the Supreme Court decided several important questions related to operation of the Competition Act. It held that (i) the COMPAT does not have jurisdiction to hear appeals from orders based on provisions not specifically contained in the Competition Act; (ii) parties have no affirmative right to be heard before the Competition Commission of India (“CCI”) orders a detailed investigation by its Director General (“DG”); (iii) the standard of proof that must be satisfied before interim relief may be granted in the event of a competition law infringement is much higher than that required to show a prima facie case in order for an investigation to be initiated by the DG; and (iv) the CCI must give reasons for its orders. The Supreme Court also issued directions with respect to confidentiality and the timetable for completing the investigation(s). 2. Kingfisher Airlines v. Competition Commission72 Kingfisher Airlines and Jet Airways announced a cooperation agreement on, inter alia, code sharing, joint fuel management, and common ground handling in October 2008 that was challenged as being anticompetitive. The Bombay High Court decided that the CCI’s jurisdiction extended to cover all anticompetitive agreements in force in India after the relevant provisions of the Competition Act73 became effective, regardless of when those agreements were first entered into. More recently, the CCI fined Kingfisher Airlines Rs.10,000,000 (approximately US$220,000) for failing to provide information requested by the DG during the investigation.74 3. Other Decisions The CCI has published several decisions closing cases on the basis that no prima facie case existed without going into any in-depth substantive analysis under the Competition Act. The reasons for taking such action include: (i) failure to supply sufficient information;75 71. Competition Comm’n v. Steel Auth. of India, Ltd., (2010) _ S.C.R. _ (India), available at http://cci. gov.in/menu/civilAppealNo.7779.pdf. 72. Kingfisher Airlines v. Competition Comm’n, 2009 A.I.R. _ (Bom.) (India), available at http://bombay highcourt.nic.in/data/original/2010/WP180609310310.pdf. 73. See Section 3 of The Competition Act, Act. No. 12 of 2003, INDIA CODE, available at http://www.cci. gov.in/images/media/competition_act/act2002.pdf?phpMyAdmin=QuqXb-8V2yTtoq617iR6-k2VA8d. 74. See, e.g., CCI Imposes Rs 1 CR Fine on Kingfisher Airlines, ECON. TIMES, Nov. 21, 2010, http://economictimes.indiatimes.com/news/news-by-industry/transportation/airlines-/-aviation/CCI-imposes-Rs-1-cr-fineon-Kingfisher-Airlines/articleshow/6964501.cms. 75. See Goel v. Seagate Singapore Int’l Headquarter, Ltd., No. C- 35/2008/DGIR, ¶¶ 8-9 (Sept. 21, 2010) (India), available at http://cci.gov.in/menu/SeagateCaseNoC35.pdf; All India Distillers’ Ass’n v. Haldyn Glass, Ltd., No. DGIR/2008/IP/11, ¶¶ 10-11 (June 18, 2010) (India), available at http://cci.gov.in/menu/ AllIndiaDistAsso170910.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 52 THE INTERNATIONAL LAWYER (ii) the other party is a government ministry and therefore not an enterprise;76 (iii) the action arose before the relevant provisions of the Competition Act came into force;77 (iv) the action complained of was a sovereign function of government;78 and (v) the CCI was not the appropriate forum.79 Europe VIII. European Union A. MERGERS During a year of lower merger activity, of particular note are the ongoing reviews of the proposed intra-Greek combination of flag carrier Olympic Air and Aegean Airlines,80 which is reminiscent of the blocked intra-Ireland Ryanair/Aer Lingus merger (upheld on appeal), and the European Commission’s unconditional clearance of Oracle’s acquisition of Sun Microsystems (following public pledges by Oracle to support Sun’s open-source database software).81 B. ANTICOMPETITIVE PRACTICES The Commission imposed high fines on companies found guilty of anti-competitive behavior. These included fines imposed on cartels in the bathroom equipment and prestressing steel sectors of =C622 million and =C458 million (approximately US$870 million and US$640 million) respectively.82 The Commission also improved the efficiency of its 76. Travel Agents Ass’n of India v. Balmer Lawrie & Co., No. 39/2010, ¶ 9.6 (Sept. 15, 2010) (India), available at http://cci.gov.in/menu/BalmerCaseNo39.pdf. 77. Kishan Cold Storage v. United Bank of India, No. 27/2010, ¶ 8 (Aug. 31, 2010) (India), available at http://cci.gov.in/menu/KishanCaseNo27.pdf; Maharashtra Textile v. Maharashtra Indus. Dev., No. 17/2009, ¶ 15 (Mar. 9, 2010) (India), available at http://cci.gov.in/menu/CCA17.pdf; Ackruti City, Ltd. v. Reliance Infrastructure, Ltd., No. 09/2010, ¶ 9 (Mar. 30, 2010) (India), available at http://cci.gov.in/menu/CCA09.pdf; Agarwal v. Punjab Nat’l Bank, No. 08/2009, ¶ 8 (Mar. 18, 2010) (India), available at http://cci.gov.in/menu/ CCA08.pdf. 78. Internet Serv. Providers v. Dep’t of Telecomms., No. 10/2009, ¶¶ 5-7 (June 29, 2010) (India), available at http://cci.gov.in/menu/CaseNo10-2009.pdf. 79. Meena v. Mohan Gas Service, No. C-22/2009/DGIR, ¶¶ 4-5 (Feb. 4, 2010) (India), available at http:// cci.gov.in/menu/MRTPC2.pdf. 80. Press Release, Europa, Mergers: Commission Opens In-Depth Investigation Into Proposed Merger Between Olympic Air and Aegean Airlines (July 30, 2010), available at http://europa.eu/rapid/pressReleases Action.do?reference=IP/10/1017. 81. Press Release, Europa, Mergers: Commission Clears Oracle’s Proposed Acquisition of Sun Microsystems (Jan. 21, 2010), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/40; Commission merger decisions are available at http://ec.europa.eu/competition/mergers/cases. 82. Press Release, Europa, Antitrust: Commission Fines 17 Bathroom Equipment Manufacturers =C622 Million in Price Fixing Cartel (June 23, 2010), available at http://europa.eu/rapid/pressReleasesAction.do? reference=IP/10/790&format=HTML&aged=0&language=EN&guiLanguage=en; Press Release, Europa, Antitrust: Commission Fines Prestressing Steel Producers _458 million for Two-Decades Long Price-Fixing and Market-Sharing Cartel (Oct. 6, 2010), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/1297&format=HTML&aged=0&language=EN&guiLanguage=en. European Commission antitrust decisions are online. Antitrust Cases, EUROPEAN COMM’N: COMPETITION, http://ec.europa.eu/ competition/antitrust/cases/index.html (last visited Feb. 4, 2011). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST 53 prosecution efforts by successfully using its new settlement procedure in two cases.83 In the pharmaceutical sector, following the conclusion of the sectoral inquiry, the Commission initiated infringement proceedings against several companies and continued its practice of monitoring patent settlement agreements. C. ABUSES OF DOMINANCE In the realm of abuse of dominance, the Commission’s focus continued to be on the behavior of companies in the high-tech industry, with two cases against IBM regarding mainframe computers,84 as well as an investigation into Apple’s iPhone policies, which closed after Apple changed its practices to remove the Commission’s concerns.85 D. COURT DECISIONS The Commission secured a significant victory in the EU General Court, which upheld its 2005 decision against AstraZeneca for actions taken to hinder the entry of generic competitors.86 In a disappointing judgment for the business community, the Court of Justice held that internal communications with in-house lawyers are not covered by legal professional privilege, and thus are discoverable in the course of a competition law investigation.87 IX. France A. MERGERS The French Competition Authority (“the Authority”), which replaced the Minister of Economic Affairs as the authority in charge of merger control in March 2009, issued its first ever phase-two clearance decision in connection with the acquisition by TF1 (the main free-to-air TV channel in France) of NT1 and TMC (two free digital TV channels in France). The Authority held that despite the relatively small NT1 and TMC market shares (less than five percent in all affected markets), the transaction would strengthen TF1’s dominant position in the market for television advertising and increase its bargain83. The Commission’s settlement procedure is available online. Legislation Settlements, EUROPEAN COMM’N: COMPETITION, http://ec.europa.eu/competition/cartels/legislation/settlements.html (last visited Feb. 4, 2011). 84. Press Release, Europa, Commission Initiates Formal Investigations Against IBM in Two Cases of Suspected Abuse of Dominant Market Position (July 26, 2010), available at http://europa.eu/rapid/pressReleases Action.do?reference=IP/10/1006. 85. Press Release, Europa, Statement on Apple’s iPhone Policy Changes (Sept. 25, 2010), available at http:/ /europa.eu/rapid/pressReleasesAction.do?reference=IP/10/1175. 86. Press Release, Europa, Judgment in Case T-321/05 AstraZeneca v. Comm’n (July 1, 2010), available at http://curia.europa.eu/jcms/upload/docs/application/pdf/2010-07/cp100067en.pdf. AstraZeneca has appealed the judgment. 87. Press Release, Europa, Judgment in Case C-550/07 P Akzo Nobel Chemicals, Ltd. v. Comm’n (Sept. 14, 2010), available at http://curia.europa.eu/jcms/upload/docs/application/pdf/2010-09/cp100090en.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 54 THE INTERNATIONAL LAWYER ing power with respect to the purchase of broadcasting rights.88 The clearance decision was made subject to strict behavioral commitments from TF1. B. ANTICOMPETITIVE PRACTICES The Authority fined eleven banks a total of =C385 million (approximately US$511 million) for colluding on interbank fees for checks.89 The collusive arrangements were designed and agreed upon when a new digital system for processing and clearing checks was introduced, and had been in force for a number of years. A small French company, NavX, which sells databases containing the locations of speed cameras, filed a complaint alleging abusive practices after Google refused its advertisements and suspended its AdWords account on the grounds that its products did not comply with Google’s internal content policies. Google undertook to restore NavX’s AdWords account and to clarify both the scope of its AdWords traffic devices policy in France and the procedure that may lead to suspension of AdWords accounts for violation of Google’s traffic devices policy in France. Following a market test, the Authority concluded that these commitments were sufficient to remove the competition concerns raised during the procedure.90 C. COURT DECISIONS The Paris Court of Appeals drastically reduced the fines imposed by the Authority on several steel producers for horizontal anticompetitive practices from a total of =C575 million (approximately US$764 million) to =C75 million (approximately US$99 million), on the grounds that the fines were disproportionately high given the ongoing economic crisis, the infringement had only a moderate impact on the market, and the Authority did not sufficiently individualize the level of the fines imposed.91 Although this judgment was considered to be a “serious blow” to the Authority, it was not appealed by the Minister of Economic Affairs, who decided instead to set up an expert committee to review the meth88. National Competition Report, CLEARY GOTTLIEB 7 (2010), http://www.cgsh.com/files/Publication/ ae1dd747-236c-4a27-a275-ff66a7025872/Presentation/PublicationAttachment/713de05d98964bff9e8a02867 38fe794/National%20Competition%20Report%20Q1%202010.pdf. 89. Décision n° 10-D-28 du 20 septembre 2010 relative aux tarifs et aux conditions liées appliquées par les banques et les établissements financiers pour le traitement des chèques remis aux fins d’encaissement [Decision No. 10-D-28: Relating to Rates and Conditions Applied by Banks and Related Financial Institutions in Processing Checks for Collection], (L’Autorité de la Concurrence [The Competition Authority] Sept. 20, 2010) (Fr.), available at http://www.autoritedelaconcurrence.fr/pdf/avis/10d28.pdf; Banks Fined =C 385m for Cheque Fees, IRISH TIMES, Sept. 20, 2010, http://www.irishtimes.com/newspaper/breaking/2010/0920/breaking35.html. 90. Décision n° 10-D-30 du 28 octobre 2010 relative à des pratiques mises en oeuvre dans le secteur de la publicité sur Internet [Decision No. 10-D-30: Relating to Practices Implemented in the Area of Internet Advertising] (L’Autorité de la Concurrence [The Competition Authority] Oct. 28, 2010) (Fr.), available at http://www.autoritedelaconcurrence.fr/pdf/avis/10d30.pdf; Eric Pfanner, Google, in Settlement, Changes Ad Rules in France, N.Y. TIMES, Oct. 28, 2010, http://www.nytimes.com/2010/10/29/technology/29google. html?_r=1. 91. Cour d’appel [CA] [regional court of appeal] Paris, 1e ch., Jan. 19, 2010, JCP 2009, II, 00334 (Fr.), available at http://www.autoritedelaconcurrence.fr/doc/ca08d32_siderurgie.pdf, (Fr.); Kiran S. Desai & Manu Mohan, Reduction of Fines–Economic Recession–Not at the Commission–Cartel Fines Cross 1.4 Billion at the End of June 2010, MAYER BROWN (July 2010), http://www.mayerbrown.com/london/article.asp?id=9288&nid=369. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST 55 odology for calculating antitrust fines. In its report, this committee presented several recommendations to strengthen safeguards of due process rights in proceedings before the Authority and suggested adopting guidelines for the method of calculating antitrust sanctions.92 The Authority issued such guidelines at the end of 2010. The Supreme Court reversed a ruling of the Paris Court of Appeals upholding the Authority’s decision to suspend the exclusivity period granted to Orange over the sale of iPhones in France. The Supreme Court held that the Paris Court of Appeals had not only failed to assess whether Orange’s competitors had alternatives to the iPhone and could therefore offer a competing solution to their customers, but also overestimated the revenues that Orange would receive as a result of the exclusivity period.93 However, Orange had already undertaken to waive its exclusive rights to the iPhone in France when this judgment was issued.94 X. Germany A. LEGISLATIVE DEVELOPMENTS In January 2010, Germany’s Federal Ministry of Economics published controversial draft legislation proposing amendments to the Act against Restraints of Competition, which would confer on the Federal Cartel Office (“FCO”) the ability to order dominant undertakings to divest certain parts of their businesses, even in the absence of an abuse of their market position or any other anticompetitive behavior.95 The draft Bill raises significant policy and constitutional concerns. Discussion of this proposed legislation is expected to continue through 2011 or 2012. B. MERGERS In the merger field, the FCO prohibited the automotive component supplier Magna from acquiring Karmann’s European convertible roof systems business on the grounds of 92. Rapport sur l’appréciation de la sanction en matière de pratiques Anticoncurrentielles [Report on the Assessment of Sanctions in the Field of Anticompetitive Practices], LE MINISTÈRE DE L’ÉCONOMIE, DES FINANCES ET DE L’INDUSTRIE [THE MINISTRY OF ECONOMY, FINANCE AND INDUSTRY], (Sept. 20, 2010), http://www. economie.gouv.fr/services/rap10/100920rap-concurrence.pdf; Eric Morgan de Rivery & Charles de Navacelle, Antitrust Alert: French Competition Authority Launches Public Consultation on Setting Antitrust Fines, JONES DAY, Jan. 21, 2011, http://www.jonesday.com/antitrust-alert—french-competition-authoritylaunches-public-consultation-on-setting-antitrust-fines-01-21-2011/. 93. Cour de cassation [Cass.] [supreme court for judicial matters], —-, Feb. 16, 2010, D.P. I 2010, 226 FSD (Fr.), available at http://www.autoritedelaconcurrence.fr/doc/cass_08mc01_fev2010.pdf; French Court Upholds Ban on iPhone-Orange Deal, KIOSKEA.NET, Feb. 4, 2009, http://en.kioskea.net/news/11957-french-courtupholds-ban-on-iphone-orange-deal. 94. Décision n° 10-D-01 du 11 janvier 2010 relative à des pratiques mises en oeuvre dans la distribution des iPhones [Decision No. 10-D-01: Relating to Practices Implemented in the Distrubution of iPhones], (L’Autorité de la Concurrence [The Competition Authority] Jan. 11, 2010) (Fr.), available at http://www. autoritedelaconcurrence.fr/pdf/avis/10d01.pdf; Melissa Lipman, Apple, Orange iPhone Proposals Prove Fruitful in France, LAW360, Jan. 22, 2010, http://www.law360.com/topnews/articles/145088/apple-orange-iphoneproposals-prove-fruitful-in-france. 95. Press Release, Monopoly Comm’n (Ger.), Mergers and Abuse Control, ¶ 32 (July 14, 2010), available at http://www.monopolkommission.de/haupt_18/presse_h18.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 56 THE INTERNATIONAL LAWYER collective dominance.96 The FCO had found that there were only three competitors left in the European market for convertible roof systems and ruled that Magna and Karmann were likely to act in a coordinated manner given their similar size and the transparency of the market. C. CARTELS AND ABUSES OF DOMINANCE = 30 million, approximately Fines were imposed for price fixing on coffee roasters (C = 115 million, approximately US$40.76 million)97 and manufacturers of ophthalmic lenses (C US$156.28 million),98 while Alstom was fined for bid rigging in relation to the sale of = 91 million, approximately US$123.66 million). utility steam generators (C In January 2010, the FCO ordered Scandlines Deutschland GmbH, the owner of the Puttgarden ferry port, to provide other ferry companies with access to the port facilities in return for adequate remuneration, so they could establish an additional ferry service on the Puttgarden-Rødby route.99 D. COURT DECISIONS In October 2009, the Berlin Kammergericht held that direct and indirect purchasers could bring damages claims, and ruled the defendant in the case in question had not proved the existence of passing on.100 However, in a June 2010 judgment, the Karlsruhe Higher Regional Court went significantly further, rejecting the passing-on defense on legal grounds.101 The court also ruled that indirect purchasers did not have legal standing to bring claims against cartel members, mainly because it would be impossible to resolve the ensuing claims between direct and indirect purchasers. Both cases have been appealed to the Federal Supreme Court. 96. Recent Developments in Competition Law, ARNOLD & PORTER LLP, (2011) http://www.arnoldporter. com/resources/documents/AdvisoryRecent_Developments_In_German_Competition_Law_1411.pdf. 97. See Press Release, Bundeskartellamt, Bundeskartellamt Imposes More Fines on Coffee Roasters (June 9, 2010), available at http://www.bundeskartellamt.de/wEnglisch/News/Archiv/ArchivNews2010/2010_06_09. php. 98. See Press Release, Bundeskartellamt, =C115 Million Fine Imposed on Manufacturers of Ophthalmic Lenses (June 10, 2010), available at http://www.bundeskartellamt.de/wEnglisch/News/Archiv/ArchivNews 2010/2010_06_10.php. 99. See Press Release, Bundeskartellamt, Bundeskartellamt Opens up the Puttgarden-Rødby Ferry Route to Competition (Jan. 28, 2010), available at http://cms.bundeskartellamt.de/wEnglisch/News/Archiv/Archiv News2010/2010_01_28.php. 100. Kammergericht [KG] [Berlin Court of Appeals] 2 U 10/03 Kart (Oct. 1, 2009) (Ger.), available at http:/ /snipurl.com/1wdyom; Kammergericht [KG] [Berlin Court of Appeals], 2 U 17/03 Kart (Oct. 1, 2009) (Ger.), available at http://snipurl.com/1wdyyd; National Competition Report, CLEARY GOTTLIEB, (Dec. 2010), http:// www.cgsh.com/files/Publication/8c9b9f5e-b943-458b-9a43-9fa366cec907/Presentation/PublicationAttachment/27cd19bf-015f-4d8c-adaa-a47e78e47c20/National%20Competition%20Report%204Q%202009.pdf; ARNOLD & PORTER LLP, RECENT DEVS. IN GERMAN COMPETITION LAW 4 (2011), http://www.arnold porter.com/resources/documents/Advisory-Recent_Developments_In_German_Competition_Law_1411. pdf. 101. Higher Regional Court Karlsruhe, Case 6 U 118/05 Kart (June 11, 2010) (Ger.), available at http:// snipurl.com/1bcywd; see Recent Developments in Competition Law, supra note 96, at 4. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST 57 XI. Russia A. LEGISLATIVE DEVELOPMENTS During the first half of 2010, a significant milestone in Russian antitrust legislation was reached with the adoption and implementation of the Second Antimonopoly Package. This package encompasses amendments to the Federal Law on the Protection of Competition (“the Competition Law”),102 the Code of Administrative Offenses,103 and the Criminal Code of the Russian Federation.104 The Second Antimonopoly Package introduced a new approach to the scope of the Competition Law. The changes affect the agreements and actions of both Russian firms and foreign businesses operating in Russia, or any activity which has an effect on the state of competition in Russia. In the sphere of merger control, the thresholds for transactions subject to antimonopoly clearance or notification were almost doubled. According to the amended Competition Law, the Federal Antimonopoly Service of the Russian Federation (“FAS Russia”) can consider a company with a market share of less than thirty-five percent to be dominant, provided that: (i) its market share exceeds that of any other company, and (ii) it can influence significantly the circulation of goods and services in the market. A new regulation was also issued for vertical and horizontal agreements. The legislation still suffers from certain defects, in particular its unreasonable severity and, in some instances, excessive regulation. The Third Antimonopoly Package, aimed at eliminating these shortcomings, has already been submitted for consideration to the Government of the Russian Federation and is expected to be approved by the Russian Parliament in spring 2011.105 The revised provisions on extraterritoriality, direct and indirect control, restrictive agreements and concerted practices, merger control, and liability are expected to increase the efficiency of antitrust regulation and hopefully improve the quality of antitrust enforcement in Russia. XII. United Kingdom A. ADMINISTRATIVE DEVELOPMENTS On October 14, 2010, the Secretary of State for Business, Innovation and Skills issued proposals to merge the competition and market investigation functions of the Competition Commission (“CC”) and the Office of Fair Trading (“OFT”). The merger is unlikely to be completed until 2012.106 102. Sobranie Zakonodatel’stva Rossiiskoi Federatsii [SZ RF] [Russian Federation Collection of Legislation] 2006, No. 135-FZ, translated at http://www.fas.gov.ru/english/legislation/26940.shtml. 103. Kodeks RF ob Administrativnykh Pravonarusheniiakh [KOAP] [Code of Administrative Violations] art. 195 (Russ.), available at http://www.russian-offences-code.com/. 104. Ugolovnyi Kodeks [Criminal Code] art. 64 (Russ.), available at http://www.russian-criminal-code.com/. 105. Andrey Tsyganov, The “Third Antimonopoly Package” Will be Liberalizing the Norms of Antimonopoly Law, FED. ANTIMONOPOLY SERV. OF THE RUSSIAN FED’N, Dec. 16, 2010, http://en.fas.gov.ru/news/news_31087. html. 106. OFT/CC Merger–a System With Mixed Motives, LEGALWEEKLAW.COM, (Oct. 26, 2010), http://www. legalweeklaw.com/abstract/oft-cc-merger-mixed-motives-5632#. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 58 THE INTERNATIONAL LAWYER B. MERGERS Only two notified mergers were referred to the CC,107 with one subsequently abandoned.108 The Secretary of State for Business, Vince Cable, has issued a European Intervention Notice in relation to News Corp’s proposed acquisition of the shares it does not already own in BSkyB. The intervention has been made in order to protect so-called legitimate interests, in this case sufficient plurality of persons with control of media enterprises. In parallel, the European Commission is investigating the impact of the proposed acquisition under the EU Merger Regulation. On September 16, 2010, the OFT and the CC published new joint OFT/CC Substantive Merger Assessment Guidelines.109 C. ANTICOMPETITIVE PRACTICES April 2010 saw the imposition by the OFT of a record total fine of £225 million (approximately US$360.5 million), on two tobacco manufacturers and ten retailers.110 Ian Norris, former head of Morgan Crucible engineering group, was extradited to the United States on March 23, 2010 to face obstruction of justice charges after his attempts to have his case heard by the European Court of Human Rights failed. In May 2010, the OFT dropped its criminal cartel prosecution of four current and former executives of British Airways.111 In June 2010, the OFT released revised guidance on Competition Disqualification Orders in competition cases.112 D. ABUSES OF DOMINANCE The OFT announced that Reckitt Benckiser has agreed to pay a fine of £10.2 million (approximately US$16.3 million) for abuse of dominance in relation to the Gaviscon drug.113 In February 2010, the fine imposed on National Grid in 2008 in an abuse of 107. Press Release, Office of Fair Trading (U.K.), OFT Refers Car Club Merger to the Competition Commission (Aug. 10, 2010), available at http://www.oft.gov.uk/news-and-updates/press/2010/89-10. 108. Press Release, Competition Comm’n (U.K.), CC Cancels Getty/Rex Inquiry (July 21, 2010), available at http://www.competition-commission.org.uk/inquiries/ref2010/Getty_Rex/pdf/ 2310_getty_images_rex_cancellation_news_release_210710.pdf. 109. Merger Assessment Guidelines, COMPETITION COMM’N (U.K.) (Sept. 16, 2010), http://www.competition-commission.org.uk/about_us/our_organisation/workstreams/analysis/cc2_review.htm. 110. Press Release, Office of Fair Trading, OFT Imposes £225m Fine Against Certain Tobacco Manufacturers and Retailers Over Retail Pricing Practices (Apr. 16, 2010), available at http://www.oft.gov.uk/news-andupdates/press/2010/39-10. 111. Press Release, Office of Fair Trading, OFT Withdraws Criminal Proceedings Against Current and Former BA Executives (May 10, 2010), available at http://www.oft.gov.uk/news-and-updates/press/2010/4710. 112. See generally, Director Disqualification Orders in Competition Cases an OFT: An OFT Guidance Document, OFFICE OF FAIR TRADING (2010), http://www.oft.gov.uk/shared_oft/business_leaflets/enterprise_act/oft510. pdf. 113. Press Release, Office of Fair Trading, Reckitt Benckiser Agrees to Pay £10.2 Million Penalty for Abuse of Dominance (Oct. 15, 2010), available at http://www.oft.gov.uk/news-and-updates/press/2010/106-10. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST 59 dominance decision was further reduced by the Court of Appeal to £15 million (approximately US$24 million).114 E. COURT DECISIONS In Cooper Tire v. Dow Deutschland, the Court of Appeal confirmed the position that an English-domiciled person may anchor a private follow-on competition damages claim in England despite not being addressees of the European Commission’s decision.115 In December 2009, the Competition Appeal Tribunal (“CAT”) issued its first substantive judgment in a follow-on action under section 47A of the Competition Act 1998.116 Middle East And Africa XIII. Israel A. LEGISLATIVE DEVELOPMENTS The Government recently introduced a draft bill proposing extensive regulation of oligopolistic markets.117 Another proposed bill would for the first time authorize the Director General of the Israeli Antitrust Authority (“IAA”) to impose fines for violating the Restrictive Trade Practices Law 1988.118 The IAA also published draft guidelines regarding the analysis of horizontal mergers.119 B. MERGERS The Director General blocked two horizontal mergers: (i) a merger that would have resulted in a perfect monopoly in the development and supply of real-time stock information systems,120 ruling that such systems were a distinct relevant market for professional investors (distinct from private investors), into which prompt and effective entry by new competitors was unlikely; and (ii) a “4-to-3” merger in the interlocking paving stones 114. See Nat’l Grid PLC v. Gas and Elec. Mkts. Auth., [2010] EWCA (Civ) 114 (Eng.), available at http:// www.bailii.org/ew/cases/EWCA/Civ/2010/114.html. 115. See Cooper Tire v. Dow Deutschland, [2010] EWCA (Civ) 864 (Eng.), available at http://www.bailii. org/ew/cases/EWCA/Civ/2010/864.html 116. See Enron Coal Servs. Ltd. v. English Welsh & Scottish Ry. Ltd., [2009] CAT 4, available at http:// www.catribunal.org.uk/files/1106_Enron_Ruling_09.02.10.pdf. 117. Turning a Page on Oligopoly Markets - New Regulation Proposed, INT’L L. OFFICE, Aug. 7, 2008, http:// www.internationallawoffice.com/newsletters/Detail.aspx?g=7774ba06-bad9-46e7-9977-68b6eaa87997. 118. Memorandum of the Restrictive Trade Practices Law (Amendment No. 12), 2010, Sept. 19, 2010, publication No. 5001663, available at http://62.219.23.243/ANTItem.aspx?ID=10567&FromSubject=100184& FromYear=2010&FromPage=0. 119. Press Release, Israeli Antitrust Auth., Horizontal Mergers Guidelines (Dec. 22, 2009), available at http:/ /archive.antitrust.gov.il/ANTItem.aspx?ID=10148&FromSubject=100199&FromYear=2010&FromPage=0. 120. See Antitrust Comm’r, Objection to a Merger: A-Online Capital (AOC) Ltd., KavManche Information and Telecommunication Services and KavManche Let-Me-Know Technology Ltd., http://archive.antitrust. gov.il/ANTItem.aspx?ID=10406&FromSubject=100040&FromYear=2010&FromPage=0. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 60 THE INTERNATIONAL LAWYER market,121 concluding that the merger might have aggravated perceived coordinated effects. In the latter case, the parties sought to invoke a failing firm defense, arguing that the target company had decided independently to exit the market. The argument was rejected in order not to encourage the engineering of transactions so as to circumvent the merger control rules. C. ANTICOMPETITIVE PRACTICES An indictment was filed against the leading food chain, Shufersal Ltd., and its managers for attempting to reach a restrictive arrangement with its distributors and for infringing the conditions imposed on Shufersal in connection with the Shufersal/Clubmarket merger.122 Allegedly, Shufersal decided to stop purchasing from suppliers who would not comply. D. COURT DECISIONS The District Court of Jerusalem convicted Mudgal (the monopolist producer of plumbing equipment in Israel), its distributors, and the latter’s managers of minimum price fixing in the market for pipe fittings.123 The court rejected the argument that Mudgal had only introduced recommended prices, ruling that price recommendations in the framework of a joint meeting with its distributors actually led to an agreement between the participants, albeit tacitly, to adopt the recommendation. XIV. South Africa A. LEGISLATIVE DEVELOPMENTS In March 2010, the Competition Commission (“the Commission”) published new service standards for merger reviews, to replace the previous 2001 standards.124 The standards are intended to help the Commission become “a high performance regulatory agency with realistic, predictable and achievable service standards in finalizing merger cases.”125 The new standards establish three categories of mergers, depending on the complexity of investigation required: non-complex, complex, and very complex mergers. The Com121. Ronit Kan, Director General’s Opposition to Merger Among S.C. Ackerstein RO S.R.L., ACKERSTEIN INDUS. & NETIVEI NOY 1 (2009), http://eng-archive.antitrust.gov.il/files/202/Ackerstein%20and%20Netivei%20 Noy.pdf. 122. Publication No. 5001572, ISRAELI ANTITRUST AUTH., (July 2010), http://archive.antitrust.gov.il/files/ 10319/07-2010.pdf; Eytan Epstein, Tamar Dolev-Green & Shiran Shabtai, Israel, 2011 GLOBAL COMPETITION REV. 210, 215-16 (2011), available at http://ecglaw.com/uploaded/Merger%20Control%202011.pdf. 123. See generally, C.D. (Jer) 1274/00 Israel v. Mudgal Ltd. et al., [2010] Publication No. 5001596, available at http://62.219.23.243/ANTItem.aspx?ID=10372&FromSubject=100069&FromYear=2010&FromPage=0. 124. Service Standards, COMPETITION COMM’N (S. Afr.), http://www.compcom.co.za/service-standards (last visited Feb. 4, 2011). 125. Maarten van Hoven, M&A Service Standards 2010, COMPETITION NEWS 12 (June 2010), http://www. compcom.co.za/assets/Uploads/AttachedFiles/MyDocuments/June-2010-newsletter-Final-Draft.pdf. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ANTITRUST 61 mission also published guidelines on the information required for each category of filing.126 B. MERGERS The Commission reported a marked decrease in large and intermediate merger notifications in 2010. Of this type of mergers, most were found to raise few competition concerns, and were approved unconditionally or with minor conditions. The Commission noted that several mergers notified during this period involved firms in financial distress. Many of these transactions raised employment concerns127 and the Commission accordingly focused on formulating conditions to ameliorate these effects. C. ANTICOMPETITIVE PRACTICES The Commission continued to focus on cartel investigations in 2010 and referred a significant number of complaints to the Competition Tribunal for prosecution. Over the past year, the Commission has investigated price fixing, customer and market allocation, and setting of trading conditions in the following industries: milling, bicycle, airline, scrap metal, and tire. The most important cartel case in 2010 was the Pioneer Foods bread cartel case in which the Tribunal imposed a fine of R195,718,614 (approximately US$27,812,425), which constitutes ten percent of the turnover of Pioneer Foods’ baking division in the 2006 financial year.128 Pioneer Foods and the Commission appealed to the Competition Appeal Court. The appeals were withdrawn by both parties after Pioneer concluded a settlement agreement with the Commission, which also related to alleged anticompetitive conduct by Pioneer in the milling, poultry, and egg industries. Eighteen complaints were settled in 2010 through consent orders confirmed by the Tribunal. D. COURT DECISIONS There were two important decisions by the Supreme Court of Appeal on competition law issues in 2010: first, the Telkom case129 involving the exercise of concurrent jurisdiction by the telecommunication authority, ICASA, and the competition authorities; and second, the procedural decision in the milk cartel case,130 which examined the power of the Commission to initiate its own complaints into potentially anti-competitive conduct. 126. See generally, Practitioner Update Issue 6: Complete Merger Filing Requirements, COMPETITION COMM’N (S. Afr.), (Mar. 2010), http://www.compcom.co.za/assets/Uploads/AttachedFiles/MyDocuments/Completefiling-notice-Mch-2010. 127. Maarten van Hoven, Merger Review, COMPETITION COMM’N (S. Afr.), 10 (June 2010), http://www. compcom.co.za/assets/Uploads/AttachedFiles/MyDocuments/June-2010-newsletter-Final-Draft.pdf. 128. Tribunal Imposes Penalty of R195 Million on Pioneer, COMPETITION COMM’N (S. Afr.), (2010), http:// www.compcom.co.za/assets/Uploads/AttachedFiles/MyDocuments/TRIBUNAL-IMPOSES-PENALTYOF-R195-MILLION-ON-PIONEER.pdf (last visited Feb. 4, 2011). 129. See generally, Competition Comm’n v. Telkom 2009 (2) All SA 433 (SCA) (S. Afr.), available at http:// www.saflii.org/za/cases/ZASCA/2009/155.pdf. 130. See generally, Woodlands Dairy v. Competition Comm’n 2010 (6) SA 108 (SCA) (S. Afr.), available at http://www.saflii.org/za/cases/ZASCA/2010/104.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International M&A and Joint Ventures EDITED BY: DUCO DE BOER, PHILIP JOHNSON, AND MARK KATZ CONTRIBUTIONS BY: SAÚL FEILBOGEN, VANESSA BALDA, MARCELO BOMBAU, MARCELO DEN TOOM, EZEKIEL SOLOMON, ANDREW FINCH, MICHAEL SCARF, PAUL LUIKI, MARIA THIERRICHTER, GORDON CAMERON, SANDRA WALKER, MIROLJUB MAĆES̆IĆ, JELENA ZJACIC, VAGN THORUP, JACOB HOEGH MADSEN, WILLIAM KANTA, DR. HARTMUT KRAUSE, H. JAYESH, BHARA BUDHALIA, NITU AGRAWAL, NUSRAT HASSAN, RON LEHMANN, FABIO REGOLI, PAMELA FULLER, DUCO DE BOER, NANCY MATOS, DAVID QUIGG, JOHN HORNER, ASHA STEWART, GONZALO RIVERA, ANNA AMOSOVA, VASSILY RUDOMINO, YEVGENYA MUCHNIK, CARL WESTERBERG, LEO LEE, FLORIAN S. JÖRG, FULYA KAZBAY, TREVOR INGLE, STEPHEN J. NELSON, DANIEL L. GOTTFRIED, AND ALLISON MASON This article reviews developments in 2010 in international mergers and acquisitions (M&As) and joint ventures (JVs) in Argentina, Australia, Austria, Denmark, Germany, India, Israel, New Zealand, the United Kingdom, and the United States. Additional reports for developments in Canada, Croatia, Italy, Japan, the Netherlands, Poland, Russia, Spain, Sweden, Switzerland, and Turkey are available on the committee’s website.1 1. For the full article see International M&A and Joint Venture Committee, Newsletters and Publications, http://apps.americanbar.org/dch/more.cfm?com=IC120000&mod=11. The committee editors of the article are Duco de Boer (Stibbe), who also co-authored the section on the Netherlands; Philip Johnson; and Mark Katz (Davies Ward Phillips & Vineberg LLP). The authors of the full article are: Argentina–Saúl Feilbogen and Vanessa Balda (Vitale, Manoff & Feilbogen) and Marcelo Bombau and Marcelo den Toom (M&M Bomchil); Australia–Ezekiel Solomon, Andrew Finch, and Michael Scarf (Allens Arthur Robinson); Austria–Paul Luiki and Maria Thierrichter (Fellner Wratzfeld & Partners); Canada–Gordon Cameron (Stikeman Elliott LLP) and Sandra Walker (Fraser Milner Casgrain LLP); Croatia–Miroljub Macesic and Jelena Zjacic (Macesic & Partners); Denmark–Vagn Thorup, Jacob Hoegh Madsen, and William Kanta (Kromann Reumert); Germany–Dr. Hartmut Krause (Allen & Overy LLP); India–H. Jayesh, Bhara Budhalia, Nitu Agrawal (Juris Corp.), and Nusrat Hassan (D.H. Law Associates); Israel–Ron Lehmann (Fischer Behar Chen Well Orion & Co.); Italy–Fabio Regoli (Jacobacci Sterpi Francetti Regoli de Haas & Assocs.); Japan–Pamela Fuller; the Netherlands–Duco de Boer (Stibbe) and Nancy Matos (Baker McKenzie); New Zealand–David Quigg, John Horner, and Asha Stewart (Quigg Partners); Poland–Gonzalo Rivera (Garrigues); Russia–Anna Amosova and Vassily Rudomino (Alrud) Yevgenya Muchnik (Squire, Sanders & Dempsey); Spain–Gonzalo Rivera (Garrigues); Sweden–Carl Westerberg and Leo Lee (Gernandt & Danielsson); Switzerland-Florian S. Jörg (Bratschi); Turkey–Fulya Kazbay (Brisel Law Offices); United Kingdom–Trevor Ingle (Hammonds) and 63 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 64 THE INTERNATIONAL LAWYER I. Argentina* A. M&A AND JV ACTIVITY IN 2010 The Argentine M&A market has shown a strong correlation with the trend existing in international markets. Compared to the first part of 2009, total investments in transactions in the first part of 2010 increased by eighty percent,2 and the total number of transactions grew from ten to eighteen, divided fairly evenly between large, medium, and small-scale transactions. This shows that trust is returning and that mergers are beginning to flow again, although there are still signs of difficulty in obtaining credit. Unlike what had been happening until relatively recently, mergers and acquisitions in the country were led by Argentine companies or affiliates of foreign groups that already had a long-established corporation (sociedad anónima) registered in Argentina. Fifty-five percent of all transactions were carried out by local groups, largely involving small or midsize targets. International investors, focusing on larger targets, led the largest transactions. Most transactions by both groups took place in the following sectors: financial services, manufacturing, energy, entertainment, and technology. Among the most important investors in the country, it appears that the traditional investors (i.e. American or European companies) have changed the direction of their funds, focusing their attention on their own markets. This explains why new participants have acquired an important role in the region. Brazilian, Russian, Indian, and Chinese investors (such as the China National Offshore Oil Corporation) are now the ones who begin to stand out. To summarize, developed countries are making the significant investments in the country, while local investors are oriented more towards mid-size or small targets. B. COMPETITION CLEARANCE OF TELEFÓNICA ACQUISITION On October 14, 2010, Argentina’s Competition Commission (CNDC) and Secretariat of Domestic Trade approved the Telefónica acquisition of an indirect stake in Telecom Italia, and through the latter in Telecom Argentina. Telecom Argentina is one of the two main telecommunications companies of Argentina, and a direct competitor of Telefónica’s subsidiary in Argentina. CNDC approved the transaction subject to the fulfillment of a detailed set of behavioral undertakings, mainly aimed at preventing Telefónica from influencing the businesses of Telecom Argentina and exchanging confidential information. This approval is surprising considering that the CNDC had been challenging the transaction for about three years. Stephen J. Nelson (Squire, Sanders & Dempsey); United States–Daniel L. Gottfried and Allison Mason (Rogin Nassau LLC). * This section was authored by Saul Feilbogen and Vanesa Balda of Vitale, Manoff & Feilbogen and Marcelo Bombau and Marcelo den Toom of M&M Bomchil. 2. Jude Webber, Argentine M&A Jumps, with a Little Help from the Brics, FIN. TIMES, Sept. 29, 2010, http:/ /blogs.ft.com/beyond-brics/2010/09/29/argentine-ma-jumps-with-a-little-help-from-the-brics. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW M&A AND JOINT VENTURES 65 II. Australia* A. SCHEMES OF ARRANGEMENT On April 22, 2010, the Assistant Treasurer (finance minister) released draft legislation that will make it easier for takeovers and mergers regulated by the Corporations Act 2001 (Cth) (the “Act”) to qualify for capital gains tax scrip for scrip rollover relief.3 Scrip for scrip rollover allows investors who exchange shares in one company for shares in another to defer the realization of any capital gains from that trade. If such draft legislation is implemented, schemes of arrangement or takeovers made pursuant to Chapter 6 of the Act where the offer consideration includes bidder scrip may become more attractive. B. REGULATION OF FOREIGN INVESTMENT Foreign investment is regulated in Australia under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the “FATA”), which gives the Australian Treasurer the power to prohibit proposed foreign investments in Australian companies and assets that are contrary to the national interest. On February 12, 2010, the reach of the FATA was extended so that transactions that result in foreign investors gaining, whether now or in the future, influence or control over an Australian company are subject to Australia’s foreign investment rules.4 The amendments, which operate retrospectively from February 12, 2009, will mean that foreign investment transactions by way of options to take up unissued shares, convertible notes, and other more sophisticated financing instruments or structures giving overseas financiers potential “equity upside” or voting power will be subject to the Treasurer’s powers to assess, impose conditions on, and prohibit such transactions. On June 30, 2010, the Australian government published its revised foreign investment policy5 to clarify the rules that will be applied when reviewing investment proposals by foreign investors, especially those from foreign governments and their related entities, in the face of significant foreign investment, particularly in the Australian resources sector, by Chinese state-owned enterprises.6 The policy identifies a number of investment pro* This section was authored by Zeke Solomon and Andrew Finch, partners of Allens Arthur Robinson, Sydney, Australia. The authors would like to acknowledge the assistance of Michael Scarf, a lawyer at Allens Arthur Robinson, in preparing this article. 3. Press Release No. 070, Senator Nick Sherry, Assistant Treasurer, Australian Treasury, Release of Draft Legislation to Widen the Scope of the Script for Script Rollover Relief (Apr. 22, 2010), available at http:// www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/070.htm&pageID=003&min=njsa&Year=& DocType=0. 4. See Press Release No. 017, Wayne Swan, Deputy Prime Minister and Treasurer, Australian Treasury, Amendments to Foreign Acquisitions and Takeovers Act (Feb. 12, 2009), available at http://ministers.treasury. gov.au/DisplayDocs.aspx?doc=pressreleases/2009/017.htm&pageID=%20003&min=wms&Year=&Doc Type=; Chapter 3: Overview of the Foreign Acquisitions and Takeovers Act 1975, FOREIGN INV. REV. BD. (Austl.), http://www.firb.gov.au/content/Publications/AnnualReports/2008-2009/Chapter3.asp (last visited Mar. 10, 2011). 5. See Foreign Investment Policy, FOREIGN INV. REV. BD. (Austl.), (Jan. 2011), http://www.firb.gov.au/content/_downloads/Australia%27s_Foreign_Investment_Policy_Jan_2011.pdf. 6. The year 2010 saw a continuation of the increase in 2009 of outbound investments by Chinese stateowned entities in the resources sector; for example, Royal Dutch Shell and PetroChina completed the acquisition of Arrow Energy. See, e.g., James Paton, Shell, PetroChina $3.1 Billion Takeover Approved by Arrow SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 66 THE INTERNATIONAL LAWYER posals that the Australian Government needs to be notified of even if the FATA does not appear to apply. C. TAKEOVERS PANEL PROVIDES GUIDANCE In Ross Human Directions,7 the Australian Takeovers Panel provided guidance on how deal protection measures for an agreed takeover bid or scheme of arrangement (such as no-shop, no-talk, and no-due diligence restrictions, as well as notification obligations, matching rights, and break fees) should be structured so as to ensure that they do not have an unacceptable effect on control of the target company. The decision is important for the negotiation of the terms of implementation agreements for change of control transactions for companies listed on the Australian Securities Exchange. III. Austria* A. RULING ON COMPETITION PROHIBITION Pursuant to Section 24 of the Austrian Act on Limited Liability Companies, managing directors are, without the consent of the company, neither entitled to conduct business in the same branch as the company nor to be a personally liable shareholder or a managing director or member of the supervisory board of a company with the same business objective. The purpose of this provision is to avoid conflicts of interest as well as the use of insider information. Section 24 is part of the duty of loyalty that managing directors owe to the company. The competition prohibition encompasses the business activities actually undertaken by the company and not any broader scope of business as may be set out in the articles of association of the company. If a managing director intends to conduct business which would otherwise run counter to the prohibition to compete he can either obtain the explicit consent of the company, obtain permission in the articles of association, or notify the company of his activities, which will be deemed allowed if the company after such notification does not prohibit such activities. On April 21, 2010, the Austrian Supreme Court held that claims against a managing director of a limited liability company resulting from unlawful competitive activity may only be raised by the company itself and not by individual shareholders.8 This ruling is relevant for joint venture companies in the form of Austrian limited liability companies. In joint venture settings certain joint venture partners often have the right to nominate managing directors of the joint venture company. Thus, it is possible that one shareholder holding a majority of the voting rights is entitled to appoint a managing director, who then violates the prohibition to compete. The nominating shareholder may decide Energy Holders, BLOOMBERG, July 14, 2010, http://www.bloomberg.com/news/2010-07-13/arrow-energysays-china-s-ndrc-has-approved-shell-petrochina-takeover-bid.html. 7. Ross Human Directions Ltd. (2010) A.T.P. 8 (Austl.). The Takeovers Panel acts as the main forum for resolving disputes about takeover bids until the relevant bid period has ended. * This section was authored by Paul Luiki, Partner, and Maria Thierrichter, Junior Partner, at Fellner Wratzfeld & Partner Rechtsanwälte GmbH in Vienna, Austria. 8. Oberster Gerichtshof [OGH] [Supreme Court] Apr. 21, 2010, docket No. 7Ob23/10y, at Bundeskanzleramt Rechtsinformationssystem [BKA/RIS], document No. JJT/20100421/OGH0002/007OB00023/ 10Y0000/000, available at http://www.ris.bka.gv.at. (Austria). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW M&A AND JOINT VENTURES 67 not to support the motion of the other joint venture partners to claim damages from such managing director. Since the ruling of the Austrian Supreme Court makes clear that only the company and not individual shareholders can raise such claims, the other shareholders would be prevented from claiming damages from the respective managing director. This makes it all the more important to provide in the joint venture agreement that a shareholder with a nomination right is obliged to hold the other shareholders harmless from any damages resulting from its managing director’s violation of the prohibition to compete. IV. Denmark* A. NEW DANISH COMPANIES ACT A new Danish Companies Act (“the Act”) adopted in June 2009 came partially into force on March 1, 2010.9 In general, the Act entails a liberalization of the rules regarding Danish public and private limited liability companies and offers some flexibility and certain advantages for M&A transaction structures. The former ten percent cap on own shares has been discarded, and the acquisition of own shares offers a simple way of assisting the buyer in the financing of the acquisition of a target company. The Act also introduces an exemption from the general rule that a target company may not, directly or indirectly, advance funds, make loans, or provide security with a view to a third party’s acquisition of the target company’s shares, or shares in its parent company. It now will be possible for a target company to assist the buyer in financing the acquisition, subject to the fulfillment of certain cumulative conditions. For the exemption to apply, a general meeting of the target company must approve any such financial assistance and the target company’s central governing body must ensure that any third party receiving financial assistance is credit-rated. Further, the total financial assistance granted by a target company to third parties must (i) at no time exceed what is reasonable in regard to the target company’s/group’s financial position; (ii) not exceed an amount equal to funds that can be distributed as dividends (i.e. the freely distributable reserves); and (iii) be provided at arm’s length. Given these quite restrictive requirements, the new rules may not facilitate the most preferable method of having the target company assist in the financing of the acquisition of its own shares. It is foreseeable that general meeting approval for the financial assistance may be burdensome to obtain. Also, the monetary restrictions could mean that the parties to the transaction decide to have the target company acquire its own shares, distribute dividends, or reduce its share capital instead of relying on the statutory exemption. The Act also introduces the right to issue non-voting shares, which may become a common feature of financing structures. Finally, the Act now stipulates that shareholders’ agreements are not binding for a target company (or any other company) or its general meeting. Accordingly, resolutions adopted at a general meeting of a target company, which are in compliance with the target * This section was authored by Vagn Thorup, Partner, Jacob Høegh Madsen, Associate, and William Kanta, Associate, of Kromann Reumert, Copenhagen, Denmark. 9. Lov om Aktie-og Anpartsselskaber (Selskabsloven) [Danish Act on Public and Private Limited Companies (the Danish Companies Act)], Chapter 1, available at http://www.dcca.dk/graphics/_ny%20eogs/English %20version/Legislation/The%20Danish%20Companies%20Act%20-%2006122010.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 68 THE INTERNATIONAL LAWYER company’s articles of association but not with a shareholders’ agreement regarding the target company, will be deemed valid and binding from a company law perspective. Shareholders’ agreements remain binding inter partes between those shareholders who are parties to it. This creates certain problems with the enforceability of shareholders’ agreements, which the parties should address. One way to ensure enforceability of the terms of a shareholders’ agreement, including its provisions on governance structure, right of first refusal, etc., is to incorporate the terms of the shareholders’ agreement into the target company’s articles of association. However, such action will also result in the terms of the shareholders’ agreement becoming publicly available. V. Germany* A. DEVELOPMENTS IN PUBLIC TAKEOVER BIDS Generally speaking, there are three alternative approaches to obtaining board representation and management control in German listed companies: (i) the traditional approach of a public tender offer at a premium price aimed at acquiring a large shareholding followed by the squeeze-out of minority shareholders, (ii) the more recent trend of “creeping in” by means of a public tender offer at the statutory minimum price in order to acquire a shareholding in the target just above the mandatory bid threshold (i.e. thirty percent of the voting rights), and (iii) the “cold takeover,” where a combination of a shareholding just below the mandatory bid threshold and activist behaviour can prepare the grounds for obtaining management control.10 Recent developments with two of these approaches, the traditional approach and the “creeping in” approach, are discussed below. 1. Premium Price Tender Offers and the Squeeze-out of Minority Shareholders The strategy of a premium price tender offer aimed at acquiring a shareholding as large as possible and the subsequent squeeze-out of minority shareholders may become easier to implement due to new legislation and case law. Four years of experience with the procedure for the squeeze-out of minority shareholders following a voluntary or mandatory public tender offer has shown that this procedure can be used successfully to obtain 100% ownership.11 The procedure requires the bidder to make a filing with the Frankfurt District Court within three months following the end of the acceptance period. The filing * This section was authored by Dr. Hartmut Krause, Partner, Allen & Overy LLP, Frankfurt, Germany. 10. See, e.g., Mike Gavin, Kuka Major Shareholder Grenzebach Buys Shares from Investor Wyser-Pratte, BLOOMBERG, Sept. 28, 2010, http://www.bloomberg.com/news/2010-09-28/kuka-major-shareholdergrenzebach-buys-shares-from-investor-wyser-pratte.html (showing the “cold takeover” of KUKA by Grenzebach); see, e.g., Werner Sperber, Augusta Technologie Schlägt Wieder Zu [Augusta Technology Strikes Again], DERAKTIONAER ONLINE (Ger.), Jan. 26, 2011, http://www.deraktionaer.de/aktien-deutschland/augusta-technologie-schlaegt-wieder-zu-14178239.htm (showing the “cold takeover” of Augusta Technologies by an “ad hoc” consortium of Lincoln Vale and the Hopp family office); see generally Hartmut Krause, Die “kalte Übernahme” [The “Cold Takeover”], in FESTSCHRIFT FUR UWE H. SCHNEIDER [In Honor of Uwe H. Schneider] 669, 669 (Ulrich Burgard et al., eds., 2011). 11. See, e.g., Oberlandsegericht Frankfurt [OLG Frankfurt] [Frankfurt Provincial Court of Appeal] Dec. 9, 2008, WpÜG 2/08 (Ger.); Landgericht Frankfurt [LG Frankfurt] [Frankfurt District Court] Mar. 13, 2009, 3-5 O 328/08 (Ger.); Landgericht Frankfurt [LG Frankfurt] [Frankfurt District Court] Aug. 2, 2007, 3-5 O 138/07 (Ger.). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW M&A AND JOINT VENTURES 69 can only be made if the bidder holds, or will hold pursuant to the offer, ninety-five percent of the voting share capital of the target company. If ninety percent of the target’s voting share capital has accepted the offer, the consideration owed under the squeeze-out will be equal to the per-share consideration paid under the public offer. New legislation is expected to be implemented that will make it easier for bidders to squeeze out minority shareholders pursuant to the squeeze-out procedure outside of the context of a public tender offer. This procedure requires a shareholding of ninety-five percent, an audit of the consideration by a court-appointed firm of chartered accountants, a shareholder vote, and registration in the commercial register. This procedure has traditionally been challenging for bidders because minority shareholders enjoy strong protection under German law: very small shareholders can challenge the shareholder resolution in court, thereby bringing the squeeze-out to a halt. Defendant companies are able to overcome the standstill and consummate the squeeze-out despite the pending litigation provided that, upon special motion, the court rules that the shareholder lawsuit is obviously without merit or that the disadvantages for the defendant company resulting from the standstill outweigh the disadvantages for the shareholder plaintiffs. Since July 2009, the court must also rule in favour of the defendant company if the plaintiff cannot prove within one week after service of the defendant company’s motion that it has held at least =C1,000 of the nominal share capital since the announcement of the shareholder meeting. Given the relatively large number of squeeze-outs registered during the year 2010, this new rule seems to have cut back excessive minority shareholder rights efficiently. Prospective bidders may be relieved to hear this. A decision handed down by the Bundesgerichtshof [BGH] [Federal Supreme Court] on July 19, 2010 provides more good news for prospective bidders.12 Under German law, minority shareholders can challenge the adequacy of the squeeze-out consideration in appraisal proceedings, which, if successful, will result in the bidder owing a higher per-share consideration. The per-share consideration must be “adequate,” which is the case if such consideration at least equals the higher of (i) the per-share discounted earnings or discounted cash flow value of the defendant company or (ii) the weighted average stock exchange price during the three-month period preceding the general meeting. This decision was criticized by practitioners because the notice period of the shareholder meeting (i.e. thirty days plus a registration period of up to six days) was part of the three-month period, so shareholders who were aware of the upcoming shareholder vote had the opportunity to drive up the stock exchange price and thereby drive up the consideration payable under the squeeze-out procedure. In the decision of July 19, 2010, the Federal Supreme Court held that in general the three-month reference period for the calculation of the volume-weighted average stock exchange price shall start at the public announcement of the transaction. As a result, bidders can better predict the total consideration payable in the squeeze-out procedure. Finally, in the future the squeeze-out of minority shareholders may, under certain circumstances, already begin if the bidder only holds ninety percent of the share capital of the target company. On July 7, 2010, the German government adopted a draft bill allowing a squeeze-out of minority shareholders in the context of an upstream-merger 12. Bundesgerichtshof [BGH] [Federal Court of Justice] July 19, 2010, II ZB 18/09 (Ger.). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 70 THE INTERNATIONAL LAWYER where the majority shareholder holds ninety percent of the share capital of the subsidiary. It is expected that the new legislation will take effect in the first half of 2011. 2. Public Tender Offer at the Minimum Price (“Creeping In”) The strategy of a no-premium tender offer aimed at acquiring a shareholding just above the mandatory bid threshold (i.e. thirty percent of the voting rights) is quite a new phenomenon in Germany. Porsche used it for its mandatory bid for Volkswagen in 2007. Deutsche Bank applied it when bidding for Deutsche Postbank in October 2010. ACS of Spain also used this tactic in its hostile exchange offer for Hochtief. German law provides for only one mandatory bid threshold. Because there are no further mandatory bid triggers between, for instance, thirty percent and fifty percent like in the United Kingdom or France, bidders holding more than the thirty percent threshold following a voluntary or mandatory takeover offer that complies with the German pricing rules13 are free to purchase additional shares without triggering a second mandatory bid. The ACS bid for Hochtief prompted German politicians to request amendments to the Takeover Act to insert extra mandatory bid triggers for bidders holding between thirty percent and fifty percent, but this was rejected in the Bundesrat chamber of the German Federal Parliament. Furthermore, the German federal government decided to abstain from interfering with the ACS bid. Germany thus did not retaliate against Spain for Spain’s last minute legislation blocking Germany’s energy supplier EON from taking control of Spanish Endesa in 2006-07. VI. India* A. RIGHT OF FIRST REFUSAL CLAUSES CONSIDERED BY INDIAN COURTS “Right of first refusal” (“ROFR”) clauses are present in almost all joint venture investment agreements involving public companies in India. These clauses oblige one of the investors to offer his shares to the others in the event the first investor desires to sell his shareholdings. That said, the legality of this clause is ambiguous when it comes to public companies, notwithstanding their widespread use. The cloud of uncertainty arises from Section 111A of the Companies Act, 1956 (“Section 111A”), which provides that the shares of a public limited company shall be “freely transferable.” Two cases in 2010 considered the legality of ROFR clauses involving shares of public companies and the meaning of the term “freely transferable.” First, in Western Maharashtra Development v. Bajaj Auto (the “Bajaj Auto Case”), a single judge of the Bombay High Court (the “Court”) struck down ROFR clauses as they relate to public companies.14 The Court was of the view that any restriction on the free transferability of shares, even if 13. The offer price must be equal or higher than the higher of (i) the three-month volume-weighted average stock exchange price or (ii) the best price paid by the bidder during the six-month period preceding the offer. WpÜG-Angebotsverordnung [WpÜGAngebV] [Offer Regulations of the Securities Acquisition and Takeover Act], Dec. 27, 2001, BGBl. I at 4263, §§ 3-6 (GER.); Wertpapiererwerbs-und ÜbernahmegestezWpÜG [German Securities Act], Apr. 22, 2002, BGBl. I at 3822, § 31(1) (GER.). * This section was authored by H. Jayesh, Founding Partner, Juris Corp., Bharat Budhalia, Associate, and Nitu Agarawal, Associate. 14. See W. Maharashtra Dev. Corp. v. Bajaj Auto Ltd., (2010) 154 Comp Cases 593 (Bom) (India). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW M&A AND JOINT VENTURES 71 stipulated between certain shareholders only, is a clear violation of the provisions of Section 111A. The Court stated that “the free transferability of shares in a public Company is founded on the principle that members of the public must have the freedom to purchase and, every shareholder, the freedom to transfer.”15 The Court held that the expression “freely transferable” is wide enough to even restrict the shareholders from themselves putting any fetters on their right to freely transfer the shares. This decision is now under appeal. In Messer Holdings v. Shyam Madanmohan Ruia (the “Messer Holdings Case”), a division bench of the Bombay High Court disagreed with the decision of the single judge in the Bajaj Auto Case and gave legal sanction to the use of ROFR clauses for public company shares.16 The Court examined the legislative intent behind the enactment of Section 111A and held that the purpose of Section 111A was to prevent a public company’s board of directors from refusing registration of shares in the name of the transferee. The Court held that though the expression “freely transferable” has to be given the broadest meaning, it cannot be construed in such a manner so as to take away the right of shareholders to enter into private arrangements to exercise their ownership rights, which includes a right to give away the power to transfer the shares under certain circumstances. But, the Court also held that a company can restrict shareholders from enforcing ROFR clauses by expressly including such a condition in its articles of association. The division bench judgment in the Messer Holdings Case seems to be consistent with the legislative history of Section 111A, but the dispute over the meaning of this provision is not over. An appeal against the decision of the division bench in the Messer Holdings Case has already been filed with the Indian Supreme Court. B. THE VODAPHONE TAX CONTROVERSY The practice of “bedding and breakfasting” Indian acquisitions in tax havens through the transfer of upstream shell holding companies incorporated in tax havens needs to be reconsidered in light of the recent Vodafone tax controversy. Vodafone Holdings (“VH”) Hong Kong acquired a controlling stake in Hutchinson Essar Ltd. (“HEL”) by acquiring shares of CGP Investment (“CGP”) Cayman Islands, the ultimate holding company of HEL, from Hutchinson Telecommunication International (“HTI”). The Indian Tax authorities (“Indian IT”) issued a notice to VH for failure to effect Withholding Tax (“WHT”) for capital gains tax on the consideration paid by VH to HTI. Indian IT contended that the consideration paid was in reality for the indirect transfer by HTI of its controlling stake in HEL, rather than the shares of CGP. Vodafone sought to challenge the India IT notice by filing a writ petition before the Bombay High Court. The Bombay High Court, though not ruling directly on the taxability of transfer of the CGP shares by HEL to VH, held that such a transfer resulted in a transfer of the rights and entitlements of HEL’s Indian business, including brands and intangibles, and also constituted a control premium and compensation for a non-compete agreement. All these constituted a “capital asset” within the meaning of the Income Tax Act 1961 (“Act”) and hence HEL was liable to tax on their transfer; as a consequence, VH 15. Id. at *53. 16. Messer Holdings Ltd. v. Shyam Madanmohan Ruia, (2010) 159 Comp Cas 29, 31 (Bom) (India). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 72 THE INTERNATIONAL LAWYER was obliged to deduct WHT on the amount paid to HEL. Because Vodafone had failed to do so, it was liable as an assessee in default under the Act. The Indian IT subsequently issued a demand notice to VH for depositing the WHT with interest (assessing the entire consideration as taxable in India in the hands of HEL). VH appealed to the Supreme Court of India and also requested a stay of the Bombay High Court’s ruling. The appeal has been admitted but no stay was granted. Irrespective of how the appeal is decided, the new Direct Taxes Code Bill 2010 proposes to tax such transfers by mandating that all income from the transfer of capital assets situated in India, whether effected directly or indirectly, will be liable to tax in India. It also further elaborates that any transfer of shares or interest in a foreign company which has underlying Indian assets, owned directly or indirectly, will also be liable to tax in India, based on fair market value to the extent of fifty percent or more in the preceding twelve months before such transfer. VII. Israel* A. PROPOSED NEW SANCTIONS WOULD INCREASE EXPOSURE DIRECTORS FOR OF OFFICERS AND SECURITIES VIOLATIONS One of the more important developments in Israeli corporate law over the past year was the introduction of the Bill for Efficient Enforcement Procedures (the “Bill”) in the Israeli Securities Authority (“ISA”).17 If the Bill is enacted, a new enforcement committee18 will be established under the aegis of the ISA with the authority to impose administrative sanctions without the judicial process required for criminal proceedings. The Bill will increase the exposure of directors and officers of Israeli companies to financial and other sanctions and will, in particular, broaden the exposure of chief executive officers of companies defined as “reporting companies” under Israeli law (generally, companies whose equity or debt is publicly held). The increased exposure to sanctions resulting from the Bill may be a relevant consideration for Israeli and foreign individuals who wish to take management and board level positions in Israeli companies. This increased exposure results from both the elimination of the burden on the ISA in criminal proceedings to prove that the offender was aware of all the elements of the crime, and the high maximum amounts for fines that may be imposed on individuals in the new administrative proceedings (up to NIS five million for “severe” offenses). The Bill will * This section was authored by Ronald A. Lehmann, Adv., partner, Fischer Behar Chen Well Orion & Co., Tel Aviv, Israel. The author wishes to thank his colleagues, Advs. Nataly Mishan-Zakai and Avi Meer, for their helpful assistance and comments. 17. The Bill passed an initial reading in the Israeli parliament (the Knesset), was approved by the Knesset Finance Committee, and has been returned to the Knesset for its second and third readings. In the absence of significant opposition, the Bill, as amended by the Finance Committee, is expected to become law. The final version of the Bill was not available at the time this article was written. 18. The Bill proposes a committee with six members: two ISA appointees and four appointees of the Minister of Justice. Two members are to have expertise in capital markets and two in securities and corporate law. The committee will sit in panels composed of three members: one ISA appointee, one capital markets expert, and one legal expert. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW M&A AND JOINT VENTURES 73 prohibit companies and their controlling shareholders from indemnifying or insuring directors and officers for liability for administrative fines.19 The enforcement committee may also (i) require that compensation be paid to victims of the administrative offense up to the maximum amount of the permissible fine; (ii) bar individuals from serving as “senior office holders” in various types of companies with responsibility for the public’s funds, including reporting companies, for up to five years for “severe” administrative offenses; or (iii) suspend an individual’s license to provide investment advice or manage portfolios if the committee determines that the offender has committed a “medium” or “severe” administrative offense. The bar on serving as a senior office holder is a particularly significant sanction as it may prevent an individual from being able to obtain appropriate employment.20 A chief executive officer’s exposure is further increased under the new concept of “supervisory liability” introduced by the Bill. Under this concept, the chief executive officer has a duty to supervise his company’s activities and take all necessary measures to ensure that employees of the company do not breach Israeli securities law. If the securities laws are breached, there is a presumption that the chief executive officer breached this duty and he may be subject to a financial sanction and be barred from serving as a senior office holder for certain periods of time. However, the chief executive officer is presumed to have fulfilled his duty to supervise if the company establishes sufficient procedures and conducts employee-training sessions to prevent such breaches. Supervisory liability can be imposed on a chief executive officer for an administrative offense even without any personal involvement by the chief executive officer in the commission of the offense. The main criticism of the Bill that has been voiced to date is the scope of power the Bill affords the ISA. Under the Bill, the ISA investigates suspected administrative offenses, prosecutes alleged offenders, and judges them. Thus, an agency subject to limited judicial review will have broad discretion to impose fines and penalties, which hitherto had been subject to proceedings before a judicial body, rather than the agency charged with enforcing the securities laws. While the Finance Committee considered restricting the ISA’s discretion in this regard, it appears likely that the final version of the Bill will grant the ISA extensive powers to impose heavy penalties without providing defendants with the protections of a judicial process. Thus, the enactment of the Bill should be a significant consideration for individuals who may wish to take management positions and board seats in Israeli companies. VIII. New Zealand* A. REVIEW OF THE OVERSEAS INVESTMENT ACT 2005 Under current New Zealand law, international mergers, acquisitions, or joint ventures may require consent from the New Zealand Overseas Investment Office in certain circumstances where there is a New Zealand business operated by the “target.” This can 19. The current version of the Bill permits indemnification and insurance for expenses incurred in the course of the administrative proceeding, including attorneys’ fees. 20. The definition of “senior office holder” is broad and includes service as a director, chief executive officer, officers reporting to the chief executive officer, controller, and internal auditor. * This section was authored by David Quigg, John Horner, and Asha Stewart of Quigg Partners. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 74 THE INTERNATIONAL LAWYER have an impact on the timing of transactions, as consent applications can take some time to be processed. Overseas investment remains a sensitive topic in New Zealand. For example, because agriculture, and in particular, the dairy sector, is such a key element of New Zealand’s economy, there is a degree of public sentiment that sales of such farms to overseas interests is “selling off the family silver.”21 In March 2009, the new national government announced a review of the overseas investment rules. The review aimed to make foreign investment in New Zealand simpler and more attractive, while at the same time protecting sensitive land, assets, and resources. In July 2009, greater decision-making powers were delegated to the Overseas Investment Office, meaning that all decisions apart from those relating to rural sensitive land, or land adjoining waterways, can now be made without reference to the Minister of Finance. We have yet to see any practical effect from this change in terms of the time taken to process applications. On September 27, 2010, the Minister of Finance announced that though the government would not seek to amend the Overseas Investment Act itself, it would make several changes to the regulations outside the Act, including:22 • “Two new measures under the benefit test used to assess investments in sensitive land: [including] [a] new ‘economic interests’ factor allowing [the relevant] ministers to consider whether New Zealand’s economic interests are adequately safeguarded and promoted” and • “[M]ore clarity about the Government’s policy on overseas investment in sensitive assets,” by way of a new ministerial directive letter to the Overseas Investment Office. These changes are expected to take effect prospectively from December 2010. B. DEVELOPMENTS IN THE LAW RELATING TO JOINT VENTURES In 2006, in the Supreme Court case of Chirnside v. Fay, the Chief Justice stated that “[w]here parties join together in a venture with a view to sharing the profit obtained, their relationship is inherently fiduciary within the scope of the venture and while it continues.”23 While essentially the inquiry as to whether a fiduciary relationship has arisen in particular circumstances is a factual one, the Supreme Court made it clear that a fiduciary duty could arise despite the absence of an express undertaking or agreement to act in the best interests of another. In Gibson v. Curtis,24 the High Court considered the application of Chirnside v. Fay, and, in particular, the imposition of fiduciary duties on parties to a joint venture. The Court held that because there was a degree of formality, both in terms of corporate structure and 21. Overseas investment in the dairy sector became an issue of increased public scrutiny in 2010 because of a proposal by Chinese interests to purchase a number of very large dairy holdings. The matter is still ongoing. 22. Press Release, Rt. Hon. Bill English, Minister of Finance, N.Z., New Investment Rules Strike the Right Balance (Sept. 27, 2010), available at http://www.beehive.govt.nz/release/new-investment-rules-strikeright-balance. 23. Chirnside v. Fay (2006) NZSC 68 (SC) (N.Z.). 24. Gibson v. Curtis, [2010] N.Z.H.C. 845 (N.Z.). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW M&A AND JOINT VENTURES 75 legal documentation, it was unlikely that there was a separate joint venture that gave rise to a fiduciary relationship between the parties. The Court went on to say that if there was such a joint venture, there was no breach of fiduciary duty established on the facts. In reaching its decision, the Court relied on Amaltal Corporation v. Maruha Corporation, where the Supreme Court ruled that where the parties chose a corporate structure, it was unlikely that their relationship as a whole would be fiduciary in nature.25 IX. United Kingdom* A. CHANGES TO U.K. TAKEOVER CODE Important changes to the U.K. Takeover Code, the U.K. regulation governing mergers and acquisitions of public companies, have been implemented in relation to the public disclosures required to be made in the period during which a target company is subject to a possible offer. These changes require an even greater level of transparency in relation to both the holding of and dealing in interests in the shares of the target and, in certain circumstances, bidder companies. These include holders of interests of one percent or more, wherever such shareholders are based. Ensuring that shareholders outside the United Kingdom are aware of such disclosure requirements sometimes remains problematic. In October 2010, the Takeover Panel, the U.K. regulator for takeovers and mergers, also published proposed reforms to the Takeover Code to deal with concerns, expressed by some, that the U.K. takeover regime is too favorable to hostile bidders and allows shortterm investors an undue level of influence in relation to takeovers of U.K. companies. These concerns were highlighted primarily by the takeover of Cadbury PLC by Kraft Food Inc., where long-established U.K. manufacturing facilities were closed after the takeover. The proposed changes seek to rebalance the position in favor of target companies, improve the offer process, and take more account of people, other than the target’s shareholders, who are affected by a takeover (e.g. a target company’s employees). The proposed changes include: (a) restricting the period to four weeks during which a target company could be subject to unwanted siege by an unsolicited bidder; (b) prohibiting, except in certain limited circumstances, the ability of a bidder to require or a target to concede break fees, non-solicitation/exclusivity undertakings, or other deal protections which, following the North American model, have become increasingly popular and, on occasion, standard over recent years; (c) requiring public disclosure of the fees charged by advisers on transactions, on an individual adviser basis; (d) requiring greater disclosure of the financing of the enlarged group post-takeover; and (e) requiring greater and more specific disclosure of the effects of a bid on the employees of the combined group and requiring more effective communication with target employees or their representatives during the bid process. The proposed amendments should be the subject of further detailed amendments. If adopted, they could mark a considerable change to the existing regime. 25. See Amaltal Corp. v. Maruha Corp., (2007) 3 NZLR 192 (SC) (N.Z.). * This section was authored by Trevor Ingle of Hammonds and Stephen J. Nelson of Squire, Sanders & Dempsey, London, England. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 76 THE INTERNATIONAL LAWYER B. CHANGES TO CORPORATE GOVERNANCE RULES As a separate development, principal changes in the area of corporate governance include: (a) the publication in May 2010 by the Financial Reporting Council (“FRC”) of the new U.K. Corporate Governance Code (the “New Code”); and (b) the publication in July 2010 by the FRC of the new U.K. Stewardship Code for institutional investors which the FRC regards as complementary to the New Code. The New Code will apply to all companies, whether incorporated in the United Kingdom or elsewhere, which have a “Premium” listing of equity shares (see further below) in respect to financial years beginning on or after June 29, 2010. The New Code replaces the 2008 Combined Code on Corporate Governance. Changes made by the New Code include the following: (a) that all directors of FTSE 350 companies should stand for reelection each year (this has been particularly controversial); (b) that FTSE 350 companies should have their board effectiveness reviews facilitated externally at least every three years; and (c) that a company’s chairman should regularly review and agree with each director as to their individual training and development needs. The Stewardship Code sets out good practices on engagement with companies in which institutional investors make investments. The FRC believes institutional investors should aspire to such practices. Like the New Code, the Stewardship Code operates on a “comply or explain” basis. This tightening of corporate governance regulation may also start to trickle down to smaller quoted companies within the United Kingdom, in some form or other, even if such companies are not formally required to comply with the above provisions. X. United States* A. POISON PILLS In a highly anticipated decision, the Delaware Supreme Court affirmed a Chancery Court decision holding that a target board’s adoption of a low-threshold net operating loss (NOL) poison pill was reasonable to protect NOLs.26 Under U.S. tax law, NOLs may be used to reduce future income taxes, but may become impaired if there is a change in control (as specially defined for tax purposes). Although traditional poison pills are often triggered by the acquisition of fifteen percent or more of a corporation, a NOL poison pill will generally be triggered by the acquisition of five percent or less of a corporation. In this case, the target company, Selectica, adopted a NOL poison pill at a time when its competitor, Trilogy, was pursuing a hostile acquisition. Trilogy elected to “buy through” the pill, triggering the rights under the plan, and subsequently argued that the pill’s 4.99% threshold was invalid under Delaware law. In its decision, the Chancery * This section was authored by Daniel L. Gottfried and Allison Mason, Rogin Nassau LLC, Hartford, CT, U.S.A. 26. Selectica, Inc. v. Versata Enter., Inc., No. 4241-VCN, 2010 WL 703062, *24 (Del. Ch. Feb. 26, 2010), aff’d, 5 A.3d 586 (Del. 2010). A poison pill is formally known as a “shareholder rights plan” and operates to thwart takeover attempts by diluting the stock holdings of unwanted acquirers. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW M&A AND JOINT VENTURES 77 Court confirmed that poison pills are generally permissible under Delaware law, and held that the decision to adopt a NOL poison pill by the Board of Directors of Selectica was entitled to deference under the “business judgment rule” because the Board reasonably believed that the NOLs were a valuable corporate asset and Trilogy’s actions posed a serious impairment threat. The Delaware Supreme Court affirmed, but was careful to state that “[t]he fact that the NOL Poison Pill was reasonable under the specific facts and circumstances of this case, should not be construed as generally approving the reasonableness of a 4.99% trigger in the Rights Plan of a corporation with or without NOLs.”27 Therefore, we can conclude that the validity of poison pills will continue to be determined on a case-by-case basis.28 B. TAXES There have been significant changes in U.S. tax laws during 2010, many of which affect U.S. enterprises with foreign operations. Furthermore, as of the date of this writing, U.S. income taxes are scheduled to increase significantly in 2011 and the U.S. Congress continues to consider legislation that would further increase income taxes on the carried interest received by many private equity and venture capital fund managers. These developments may lead to a surge in year-end deal flow for 2010. Depending on the resolution of open issues in the U.S. Congress in the coming months, these developments may also indicate a slow-down in deal flow for 2011, especially in cross-border mergers and acquisitions involving U.S. acquirers, as well as private equity/venture capital exit transactions. 27. Versata Enter., Inc v. Selectica, Inc., 5 A.3d 586, 607 (Del. 2010), aff’g Selectica, Inc. v. Versata Enter., Inc., No. 4241-VCN, 2010 WL 703062 (Del.Ch. Feb. 26, 2010). 28. See Steven M. Davidoff, Delaware Broadens Standards for Poison Pills, N.Y. TIMES, Mar. 2, 2010, http:// dealbook.blogs.nytimes.com/2010/03/02/delaware-broadens-standards-for-poison-pills/; Allen Calhoun, Versata v. Selectica: Green Light for NOL Poison Pills But With A Shift In Logic?, BNA FEDERAL TAX BLOGS, Oct. 12, 2010, http://www.bnatax.com/blogsdetail.aspx?id=2147485424&. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Trade EDITED BY: AUTHORED JOSEPH A. LAROSKI, JR. BY: ROSE SALES, AND VALENTIN A. POVARCHUK PABLO M. BENTES, SARAH K. DAVIS, JOHN M. RYAN, MARGARET- AND JAMIE D. UNDERWOOD* I. Negotiation Developments A. WTO NEGOTIATIONS 1. Doha Round Doha Development Round negotiations continued at a glacial pace in 2010. Part of this slowness was undoubtedly because the United States lacked a chief World Trade Organization negotiator until April.1 The United States held bilateral and small group negotiations to build consensus on issues but achieved no significant breakthroughs.2 WTO Members plan to “re-start” intensive negotiations in 2011.3 2. Accession Negotiations Although thirty countries are in various stages of the accession process, the WTO acquired no new members during 2010. Russia’s 17-year bid for membership gathered steam. As part of efforts to “reset” relations with Russia, President Obama and Russian President Medvedev agreed to accelerate U.S.-Russian negotiations on accession and * Mr. Laroski (co-editor) is Associate General Counsel at the Office of the U.S. Trade Representative. Mr. Povarchuk (co-editor) is an Associate at Arent Fox LLP. Mr. Bentes (WTO Dispute Settlement Activity) is a Legal Officer with the Appellate Body Secretariat of the World Trade Organization. Ms. Davis (U.S. Trade Remedies, Administrative Determinations) is an Associate at King & Spalding LLP. Mr. Ryan (NAFTA Dispute Settlement Activity and U.S. Trade Remedies, Court Decisions) is Counsel at Hughes, Hubbard & Reed LLP. Ms. Sales (Negotiation Developments) is an Associate with Mayer Brown LLP. Ms. Underwood (Section 337 Developments) is a Partner at Adduci, Mastriani & Schaumberg LLP. 1. Press Release, White House Office of the Press Sec’y, President Obama Announces Recess Appointments to Key Administration Positions (Mar. 27, 2010), available at http://www.whitehouse.gov/the-pressoffice/president-obama-announces-recess-appointments-key-administration-positions. 2. Talking Substance in Geneva, 19 WASH. TRADE DAILY 213, Oct. 27, 2010. 3. Preparing for Intensive DDA Negotiations, 19 WASH. TRADE DAILY 232, Nov. 22, 2010. 79 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 80 THE INTERNATIONAL LAWYER pressed negotiators to resolve outstanding bilateral issues by September.4 Unresolved issues included agricultural subsidies, intellectual property rights, import tariffs on pork and cars, and export duties on copper and nickel. B. BILATERAL/REGIONAL NEGOTIATIONS 1. Bilateral Investment Treaties In 2009, the State Department and the U.S. Trade Representative (“USTR”) began a review of the 2004 U.S. Model Bilateral Investment Treaty (“BIT”). Neither agency released any reports on the progress of the review in 2010. But, a major issue under consideration is likely the extent to which labor rights and environmental protections will be included in the new model BIT.5 BIT negotiations with India, China, Pakistan, and Georgia have been put on hold until the model BIT review is completed. 2. Anti-Counterfeiting Trade Agreement The United States concluded negotiations of the Anti-Counterfeiting Trade Agreement (“ACTA”) and released the final text in November 2010.6 Other parties to the agreement are Australia, Canada, the European Union, Japan, Mexico, Morocco, New Zealand, Singapore, South Korea, and Switzerland. ACTA creates a framework to assist treaty parties in their efforts to “combat the infringement of intellectual property rights, in particular the proliferation of counterfeiting and piracy.”7 A key element of the agreement is its enforcement provisions that provide for civil, criminal, and border enforcement of intellectual property rights, including digital copyright piracy.8 ACTA will go into effect when six countries have ratified it. 3. Trans-Pacific Partnership Agreement After announcing its intent to participate in the Trans-Pacific Partnership (“TPP”) Agreement in late 2009, the United States engaged in three rounds of negotiations in 2010. The Obama Administration hopes the broad-based regional trade agreement will help increase U.S. exports to Asia-Pacific and will contribute to its goal of doubling exports by 2014.9 The TPP is also seen as a potential vehicle for wider economic integration in the Asia-Pacific region. The other TPP members are Australia, Brunei 4. U.S.-Russia Relations: “Reset” Fact Sheet, WHITE HOUSE OFFICE OF THE PRESS SEC’Y, June 24, 2010, http://www.whitehouse.gov/the-press-office/us-russia-relations-reset-fact-sheet. 5. Hormat Says Administration To Seek Further Vetting With Congress on Model BIT, WORLD TRADE ONLINE (Daily News), Nov. 16, 2010. 6. Anti-Counterfeiting Trade Agreement (ACTA), OFFICE OF U.S. TRADE REPRESENTATIVE, http://www. ustr.gov/acta. 7. U.S., Participants Finalize Anti-Counterfeiting Trade Agreeement Text, OFFICE OF U.S. TRADE REPRESENTATIVE, Nov. 15, 2010, http://www.ustr.gov/about-us/press-office/press-releases/2010/november/us-participants-finalize-anti-counterfeiting-trad. 8. Id. 9. Trans-Pacific Partnership, OFFICE OF U.S. TRADE REPRESENTATIVE, http://www.ustr.gov/tpp (last visited Feb. 25, 2011). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL TRADE 81 Darussalam, Chile, New Zealand, Peru, Malaysia, Singapore, and Vietnam. Canada, Indonesia, Japan, and the Philippines have expressed interest in joining TPP talks.10 Although few details about the TPP talks have been made public, a disagreement over goods market access has emerged. The United States favors bilateral negotiations between TPP members, while other countries prefer multilateral goods market access negotiations.11 TPP members are expected to submit goods market access offers in January 2011, between the fourth and fifth rounds of talks.12 This and other issues will need to be resolved expeditiously if the parties want to complete negotiations by November 2011. II. WTO and NAFTA Dispute Settlement Activity A. WTO DISPUTE SETTLEMENT ACTIVITY The number of new WTO disputes initiated in 2010 was commensurate with the average of previous years, with twelve new disputes. This number of disputes is the same as in 2009 but is less than the eighteen disputes initiated in 2008.13 Most disputes initiated in 2010 involved trade remedy measures adopted by WTO Members after the 2008-2009 global economic crisis, thus involving complaints under the Antidumping Agreement (“AD Agreement”), the Subsidies and Countervailing Measures Agreement (“SCM Agreement”), and the Agreement on Safeguards (“Safeguards Agreement”).14 1. Panel and Appellate Body Reports a. EC–Large Civil Aircraft The most significant decision by a WTO panel (“Panel”) in 2010 was EC–Large Civil Aircraft, issued on June 30, 2010.15 The United States successfully challenged subsidization by the European Union (“EU”) and four of its Member States–France, Germany, Spain, and the U.K.–with respect to large civil aircraft (“LCA”) developed, produced, and sold by Airbus. The Panel agreed that a variety of measures such as launch aid financing, infrastructure grants, investments by the French and German governments, and research and technological grants by the four Member States, were specific subsidies that caused serious prejudice to U.S. interests within the meaning of Article 5(c) of the SCM Agreement. Before the Panel, the United States argued that the subsidies provided to Airbus caused serious prejudice to its interests under Article 5(c) of the SCM Agreement, in the form of: (i) displacement or impedance of imports of Boeing LCA from the market of the E.U. under Article 6.3(a); (ii) displacement or impedance (or threat thereof) of exports of Boeing LCA from the markets of Australia, Brazil, China, Chinese Taipei, India, Korea, Mex10. TPP Officials to Meet Reps from Countries Interested in Joining at APEC, INSIDE U.S. TRADE, Nov. 5, 2010. 11. TPP Countries Aim To Table Goods Market Access Offers in January, INSIDE U.S. TRADE, Oct. 22, 2010. 12. Id. 13. See Chronological List of Disputes Cases, WTO, http://www.wto.org/english/tratop_e/dispu_e/dispu_status_e.htm (last visited Feb. 25, 2011). 14. Id. 15. See Panel Report, European Communities and Certain Member States–Measures Affecting Trade in Large Civil Aircraft, WT/DS316/R, (June 30, 2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 82 THE INTERNATIONAL LAWYER ico, and Singapore under Article 6.3(b); and (iii) significant price undercutting, significant price suppression, price depression, and lost sales in the same market under Article 6.3(c). The Panel largely agreed with the United States that various instances of launch aid financing were specific within the meaning of Articles 1 and 2 of the SCM Agreement. In so finding, the Panel rejected the E.U.’s preliminary argument that launch aid measures granted before the SCM Agreement’s entry into force in 1995 were not subject to the disciplines of that agreement. The Panel reasoned that the legal obligation contained in Article 5 of the SCM Agreement focuses on the effects of the subsidies, which suggests that panels can examine the WTO consistency of subsidies granted before the SCM Agreement’s entry into force, so long as the effects of those subsidies manifest themselves after entry into force.16 Of the seven launch aid measures challenged by the United States, the Panel found that only the German, Spanish, and U.K. launch aid measures for the A380 constituted subsidies that were de facto export contingent. The Panel reasoned that the sales-dependent repayment terms under those measures suggested that they were at least in part conditional upon anticipated export sales.17 Pursuant to Article 4.7 of the SCM Agreement, the Panel recommended that the E.U. withdraw these subsidies without delay and specified that the E.U. should do so within ninety days.18 Turning to the U.S. claims that the Airbus subsidies caused adverse effects to U.S. interests under Articles 5 and 6 of the SCM Agreement, the Panel conducted a “bifurcated” analysis of the U.S. claims under Article 6.3 (a), (b), and (c) of the SCM Agreement. At the first step of its analysis, the Panel found that the volume and market share data submitted by the United States sufficiently demonstrated that between 2001 and 2006 Boeing LCA was displaced by Airbus LCA from the markets of the E.U., Australia, Brazil, China, Chinese Taipei, Korea, Mexico, and Singapore.19 The Panel also made an affirmative finding for threat of displacement of Boeing LCA from the Indian market, based on order data.20 After finding all volume and price effects claimed by the United States, the Panel then found that the United States sufficiently established that launch aid shifted the risk of an LCA program to the lender governments, thus making the launch of a program more likely.21 The Panel also found that learning curve economies of scope and scale suggested that the launch of each subsequent model of Airbus LCA was dependent on launch aid provided for earlier models.22 The Panel thus found that, but for the Airbus subsidies, Boeing would not have lost the sales and market share that it did in the relevant third country markets. The Panel concluded that the Airbus subsidies caused the displacement of Boeing LCA from the E.U. and third country markets, and significant lost sales in the same markets, within the meaning of Article 6.3 (a), (b) and (c) of the SCM Agreement.23 16. 17. 18. 19. 20. 21. 22. 23. See See See See See See See See id. id. id. id. id. id. id. id. ¶ 7.64. ¶¶ 7.652, 7.656, 7.659. ¶ 8.6. ¶¶ 7.1790-91. ¶ 7.1784. ¶ 7.1912. ¶ 7.1936. ¶ 7.1993. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL TRADE 83 On July 21, 2010, the E.U. appealed practically all of the Panel’s findings in EC–Large Civil Aircraft. The United States cross-appealed, but its challenge largely focused on the four launch aid programs that the Panel did not find to constitute prohibited export subsidies. The Appellate Body Report is expected in 2011. b. U.S.–AD CVD In another significant victory, the United States prevailed over China in U.S.–Definitive Antidumping and Countervailing Duties on Certain Products from China.24 The complaint concerned four concurrent U.S. countervailing and antidumping duty measures imposed on products from China. The Panel rejected China’s claims that the imposition of a “double remedy,” that is, of countervailing duties concurrently with antidumping duties calculated pursuant to Commerce’s non-market economy methodology (“NME”), was both “as such” and “as applied” inconsistent with Articles 10, 12.1, 12.8, 19.3, 19.4, and 32.1 of the SCM Agreement or with Articles I:1 and VI of the GATT 1994. The Panel found that the measure challenged “as such” by China was outside of the Panel’s terms of reference, because it had not been properly identified in China’s request for consultations.25 Turning to China’s “as applied” claims, the Panel dismissed China’s claims under Articles 10, 19.3, 19.4, and 32.1 of the SCM Agreement and Article VI:3 of the GATT 1994. Although the Panel recognized that the simultaneous imposition of antidumping duties calculated under an NME methodology and of countervailing duties could result in subsidies being offset more than once (the “double remedy”), the Panel did not consider that any of the provisions of the SCM Agreement cited by China prohibited the imposition of both antidumping and countervailing duties with respect to domestic subsidies. The Panel also observed that China’s Protocol of Accession does not address the issue of “double remedies,” but does contemplate the use of countervailing duties while China remains an NME.26 The Panel also found that Articles 12.1 and 12.8 of the SCM Agreement did not require Commerce to adopt criteria to assess the occurrence of double remedies.27 The Panel rejected China’s claims under Article I:1, because in its view China failed to establish that Commerce maintained a policy or practice of avoiding offsetting the same subsidies through antidumping and countervailing duties in the case of market economy imports.28 Finally, the Panel declined to take account of a recent CIT decision that concluded that U.S. law required Commerce to avoid offsetting the same subsidies twice when it uses its NME methodology in countervailing duty and antidumping investigations.29 The Panel emphasized that its task was limited to determining the WTO-consistency of the imposition of double remedies. China appealed these and other findings on December 1, 2010. The Appellate Body will circulate its report on March 11, 2011. 24. See Panel Report, United States–Definitive Antidumping and Countervailing Duties on Certain Products from China, WT/DS379/R, (Oct. 22, 2010). 25. See id. ¶ 14.42. 26. See id. ¶¶ 14.120-21. 27. See id. ¶ 14.149. 28. See id. ¶ 14.182. 29. GPX Int’l Tire Corp. v. United States, 645 F. Supp. 2d 1231 (Ct. Int’l Trade 2009). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 84 THE INTERNATIONAL LAWYER B. NAFTA DISPUTE SETTLEMENT ACTIVITY A NAFTA binational panel found Commerce’s zeroing practice to be contrary to the statute, largely due to its finding that the statute should be interpreted in a manner consistent with U.S. obligations under the WTO Agreements. In the NAFTA panel review of Commerce’s antidumping administrative review determination regarding Stainless Steel Sheet and Strip in Coils from Mexico,30 the binational panel held that the practice of “zeroing” of negative antidumping margins is contrary to the statute. The panel found that the statute requires that Commerce employ a methodology that includes all sales.31 The panel reasoned that there were two lines of cases in the Federal Circuit: one that ignored WTO consistency and another that gave credence to WTO consistency in the interpretation of the U.S. statute.32 The panel decided to follow the later line of cases, and found that Chevron deference accorded to Commerce’s reasonable interpretation of a statute did not trump the Charming Betsy doctrine that the statue be interpreted as consistent with U.S. international obligations.33 The panel remanded the administrative review determination back to Commerce to recalculate the respondent’s antidumping margin without zeroing.34 Two panelists dissented in a strongly worded critique of the majority’s decision.35 Two other NAFTA panel decisions concerned Light-Walled Rectangular Pipe and Tube from Mexico. One binational panel affirmed Commerce’s “offsetting” methodology as a replacement to zeroing in original investigations.36 The Panel’s reasoning closely parallels but predates the Federal Circuit’s reasoning in U.S. Steel Corp. v. United States.37 Another binational panel decision affirmed the ITC’s rejection of new information submitted after the close of the ITC’s briefing, but remanded for failure to provide sufficient explanation for reducing the weight accorded to evidence regarding the most recent period.38 30. Article 1904 Binational Panel Review, Stainless Steel Sheet and Strip in Coils from Mexico: Final Results of 2004/2005 Antidumping Review, Secretariat File No. USA-MEX-2007-1904-01 (Apr. 14, 2010), available at http://registry.nafta-sec-alena.org/cmdocuments/edce701c-9720-424b-b232-1fd714d318ba.pdf. 31. Id. at 10. 32. Id. at 20-21. 33. Id. at 11. 34. Id. at 24. 35. Id. at 53. 36. Article 1904 Binational Panel Review, Light-walled Rectangular Pipe and Tube from Mexico, Final Determination of Sales at Less Than Fair Value, Secretariat File No. USA-MEX-2008-1904-03 (July 20, 2010). 37. U.S. Steel Corp. v. United States, 621 F.3d 1351 (Fed. Cir. 2010). 38. Article 1904 Binational Panel Review, Light-walled Rectangular Pipe and Tube from Mexico, Final Determination of Material Injury to a U.S. Industry, Secretariat File No. USA-MEX-2008-1904-04 (Nov. 26, 2010), available at http://registry.nafta-sec-alena.org/cmdocuments/0263a90b-7544-48fc-a80b-50b814291e5a.pdf. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL TRADE 85 III. U.S. Trade Remedy Cases A. ADMINISTRATIVE DETERMINATIONS 1. Targeted Dumping Methodology Commerce is permitted to find “targeted dumping” where “there is a pattern of export prices (or constructed export prices) for comparable merchandise that differ significantly among purchasers, regions, or periods of time.”39 In such cases, Commerce may calculate margins using an “average-to-transaction” methodology.40 The 2008 Year-in-Review article discussed Commerce’s targeted dumping methodology and the withdrawal of the targeted dumping regulations.41 Recognizing the withdrawal of its regulations, however, Commerce continued to explore its options regarding its targeted dumping methodology.42 In March 2010, Commerce established its new targeted dumping methodology in the Polyethylene Retail Carrier Bags from Taiwan.43 In previous determinations, Commerce had applied an “average-to-transaction” methodology only to those sales found to have been targeted.44 After withdrawing its targeted dumping regulations, Commerce shifted its approach, determining that the “average-to-average” methodology applied to all sales masked the dumping margins attributable to targeted sales by averaging those higherpriced sales with the lower-priced, non-targeted sales of the same product.45 Applying the “average-to-transaction” methodology to all sales, however, unmasked such targeted dumping.46 Furthermore, Commerce determined in PRCBs from Taiwan that the statute permitted application of the “average-to-transaction” methodology to all sales and not just targeted sales.47 The new targeted dumping methodology means that where targeted dumping is found, non-dumped sales having “negative” margins will not be allowed to offset the margins attributable to the dumped sales, resulting in higher dumping margins. Commerce’s new approach may face criticism from the WTO Members who have disputed its practice of zeroing. 2. Application of CVD Law to Vietnam On May 1, the first CVD order was imposed on imports of goods from Vietnam,48 making it the second NME country to have the CVD law applied to it. In the final determination, Commerce determined that application of both the CVD law and the AD law 39. 19 U.S.C. § 1677f-1(d)(1)(B)(i) (2010). 40. 19 U.S.C. § 1677f-1(d)(1)(B). 41. Pablo M. Bentes et al., International Trade, 43 INT’L LAW. 335, 348 (2009). 42. Polyethylene Retail Carrier Bags from Indonesia, 74 Fed. Reg. 56,807 (Nov. 3, 2009). 43. Polyethylene Retail Carrier Bags from Taiwan, 75 Fed. Reg. 14,569-70 (Mar. 26, 2010) [hereinafter PRCBs from Taiwan]. 44. See, e.g., Certain Steel Nails From the United Arab Emirates, 73 Fed. Reg. 33,985 (June 16, 2008). 45. 75 Fed. Reg. 14,569-70. 46. Id. 47. Id. 48. Polyethylene Retail Carrier Bags from the Socialist Republic of Vietnam, 75 Fed. Reg. 23670 (May 4, 2010) (Countervailing Duty Order) [hereinafter PRCBs from Vietnam]. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 86 THE INTERNATIONAL LAWYER using the NME methodology was appropriate and consistent with Congressional intent.49 Commerce noted that Congressional statements of its intent with respect to the application of the CVD law contained no indication that the NME antidumping methodology might be abandoned.50 Commerce also addressed arguments relying on the Court of International Trade (“CIT”) decision in GPX Int’l Tire Corp. v. United States,51 pointing out in its final determination that the GPX Tire decision had not been finalized.52 Commerce also noted that in previous cases it had determined that the application of countervailing duty law to non-market economy countries was consistent with China’s commitments contained in China’s WTO accession protocol.53 Commerce stated that because Vietnam’s WTO accession protocol contained commitments similar to China’s commitments, the application of CVD law to Vietnam, likewise, was consistent with Vietnam’s WTO Accession Protocol commitments.54 Finally, Commerce found that its determinations regarding application of the CVD law to an NME are made on a country-by-country basis and that Vietnam had progressed sufficiently so subsidies could be both measured and identified.55 Until appellate rights in GPX Tire have been exhausted, Commerce’s current practice allows for the application of CVD law to non-market economies. 3. Initiation of Section 301 Investigation On October 20, the USTR initiated an investigation in response to a petition filed by the United Steel Steelworkers (“USW”) pursuant to Section 302(a) of the Trade Act of 1974 (the “Act”).56 Section 301 of the Act permits the USTR to request consultations with the foreign country implicated by the investigation57 but has not been widely utilized in recent years. 49. Issues and Decision Memorandum for PRCBs from Vietnam, 75 Fed. Reg. 16,428, cmt. 1 (Apr. 1, 2010). 50. Issues and Decision Memorandum for Certain Tow-Behind Lawn Groomers and Certain Parts Thereof from the People’s Republic of China, 74 Fed. Reg. 29,180, cmt. 1 (June 19, 2009). 51. GPX Int’l Tire Corp. v. United States, 645 F. Supp. 2d 1231 (Ct. Int’l Trade 2009). 52. The decision in GPX Tire is now final, although appellate rights have not been exhausted. See GPX Int’l Tire Corp. v. United States, Slip Op. 10-84, 2010 Ct. Int’l Trade LEXIS 88 (Aug. 4, 2010) (remanding to Commerce with instructions to forego the imposition of the CVD law, because Commerce had not demonstrated that it could determine the degree of double counting that occurred when both the CVD law and non-market economy antidumping law are applied); GPX Int’l Tire Corp. v. United States, Slip Op. 10112, 2010 Ct. Int’l Trade LEXIS 114 (Oct. 1, 2010) (sustaining Commerce’s remand determination foregoing the imposition of the CVD law and acknowledging that Commerce had made its determination under protest and had stated an intention to appeal). 53. PRCBs from Vietnam, 75 Fed. Reg. 16,428, cmt. 1. 54. Id. 55. Id. 56. Initiation of Section 302 Investigation and Request for Public Comment: China-Acts, Policies and Practices Affecting Trade and Investment in Green Technology, 75 Fed. Reg. 64,776 (Oct. 20, 2010) [hereinafter Green Technology Investigation]. 57. Id. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL TRADE 87 The investigation was initiated to address acts, policies, and practices affecting trade and investment in green technologies in China.58 The petition alleged that China protects domestic producers of green technology in a manner that is inconsistent with its WTO commitments59 and that that China’s export restraints, prohibited subsidies, discrimination against foreign companies and imported goods, technology transfer requirements, and domestic subsidy programs have resulted in “serious prejudice to U.S. interests.”60 On December 22, 2010, the USTR announced that it had requested formal WTO consultations with China regarding subsidies on wind power equipment.61 4. Determinations Not To Initiate CVD Investigation With Respect to China’s Undervaluation of its Currency On September 7, Commerce determined in the Aluminum Extrusions that it would not initiate an investigation relating to petitioners’ currency manipulation allegation.62 Commerce stated that it would defer “initiating on petitioners’ allegation that the [Government of China], in an effort to benefit domestic producers, intervenes in the currency market in order to ensure that the RMB/U.S. dollar exchange rate understates the value of the RMB.”63 A similar determination was made in the Certain Coated Paper, where Commerce stated that it had “determined not to investigate a new subsidy allegation regarding currency undervaluation.”64 Given recent developments regarding legislation concerning currency manipulation, it is unclear whether Commerce will consider currency manipulation as a trade subsidy in the future. 5. Chinese Government Procurement as a Countervailable Subsidy In Aluminum Extrusions, Commerce countervailed the Chinese government procurement for the first time.65 One respondent provided complete sales information, including information identifying which customers were Government of China authorities.66 Commerce determined that the respondent sold aluminum extrusions to government authorities, constituting a financial contribution under 19 U.S.C. § 1677(5)(D)(iv).67 Commerce then examined whether a benefit was conferred under 19 U.S.C. §1677(5)(E)(iv). Commerce used the respondent’s sales to privately-owned customers as a benchmark and com58. United States Launches Section 301 Investigation Into China’s Policies Affecting Trade and Investment in Green Technologies, OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE, Oct. 15, 2010, http://www.ustr.gov/ node/6227. 59. Green Technology Investigation, 75 Fed. Reg. 64,776. “Green technology” is defined as wind and solar energy products, advanced batteries, and energy-efficient vehicles, among others. Id. 60. Id. 61. See U.S. Requests WTO Consultations With China Over Wind Power Subsidies, INSIDE U.S. TRADE, Dec. 23, 2010. 62. Aluminum Extrusions From the People’s Republic of China, 75 Fed. Reg. 54,302 (Sept. 7, 2010). 63. Id. at 54,303. 64. Certain Coated Paper Suitable for High-Quality Print Graphics Using Sheet-Fed Presses From the People’s Republic of China, 75 Fed. Reg. 59,212-13 (Sept. 27, 2010). 65. Aluminum Extrusions From the People’s Republic of China: Preliminary Affirmative Countervailing Duty Determination, 75 Fed. Reg. 54,302, 54,307 (Sept. 7, 2010). 66. Id. at 54,319. 67. Id. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 88 THE INTERNATIONAL LAWYER pared the benchmark sales price to the prices charged to the government authorities.68 Based on this comparison, Commerce determined that the respondent received a benefit.69 Commerce found that the procurement program is specific under 19 U.S.C. § 1677(5A)(C), because it is contingent on the use of domestic goods over imported goods.70 Commerce’s finding that Chinese Government procurement is a countervailable subsidy is significant to the application of CVD law to non-market economies. It is the first time that Commerce found such a program to be countervailable. B. COURT APPEALS OF INTERNATIONAL TRADE REMEDY CASES 1. Federal Circuit Decisions In U.S. Steel Corp. v. United States,71 the issue before the Federal Circuit was whether Commerce’s section 129 determination, which modified Commerce’s zeroing methodology in response to a WTO Appellate Body decision, was consistent with the statute. Commerce adopted an “offsetting” methodology in original investigations that replaced the zeroing of negative antidumping margins in its average-to-average calculations in original investigations. As a result of the change in methodology, the respondent’s margins were reduced to de minimis. The Federal Circuit, citing several of its prior decisions, held that the statute was “silent or ambiguous” as to Commerce’s zeroing methodology. The Court accorded Commerce Chevron deference and upheld the new methodology as a reasonable interpretation of the statute. In ThyssenKrupp Acciai Speciali Terni S.p.A. v. United States,72 the Federal Circuit affirmed Commerce’s decision to limit section 129 determinations to the those issues affected by the WTO report. In earlier decisions regarding the zeroing issue, the Court declined to give any weight to the WTO-inconsistency of Commerce’s zeroing practice.73 But in Thai I-Mei Frozen Foods Co. Ltd. v. United States,74 the Federal Circuit affirmed the use of the WTO Agreements “as context, informing its analysis of the Congressional intent behind the statutory provisions.”75 Nevertheless, the Federal Circuit reversed and held Commerce’s decision to exclude sales outside the ordinary course of trade in determining profit margins based on companies other than the respondent company was permissible under the statute. In Gallant Ocean (Thailand) Co. Ltd. v. United States,76 the Federal Circuit circumscribed Commerce’s latitude in applying antidumping margins based on adverse facts available. The Court found that Commerce’s adverse facts available margins, which were set at the rate alleged in the petition and at ten times the average rate of the cooperative respondent, 68. Id. at 54,319-20. 69. Id. 70. Id. 71. U.S. Steel Corp. v. United States, 621 F.3d 1351 (Fed. Cir. 2010). 72. ThyssenKrupp Acciai Speciali Terni S.p.A. v. United States, 603 F.3d 928 (Fed. Cir. 2010). 73. See, e.g., Timken Co. v. United States, 354 F.3d. 1334, 1341-43 (Fed. Cir. 2004); Corus Staal B.V. v. United States, 395 F.3d 1343, 1345-47 (Fed. Cir. 2005). 74. Thai I-Mei Frozen Foods Co., Ltd. v. United States, 616 F.3d 1300, 1307 (Fed. Cir. 2010) (emphasis added). 75. Id. 76. Gallant Ocean (Thailand) Co. Ltd. v. United States, 602 F.3d 1319 (Fed. Cir. 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL TRADE 89 were “punitive, aberrational, or uncorroborated.”77 The Court reasoned that Commerce’s adverse facts were “unrelated to commercial reality” and not a reasonable estimate.78 In Agro Dutch Indus. Ltd. v. United States,79 the Federal Circuit delineated the situations under which re-liquidation may be appropriate. The Federal Circuit upheld the CIT’s decision to extend its injunction against liquidation pending appeal to include the five-day period between the issuance of the injunction and its stated effective date. On the fifth day of this five-day period, Customs was served with notice of the injunction, but also on the same day, Customs liquidated most of respondent’s imports.80 The Federal Circuit held that while the Zenith rule ordinarily renders moot court actions in which liquidation has already occurred, there are exceptions to that general rule in which Shinyei re-liquidation relief may be appropriate.81 The Court found that the Zenith rule would not apply when re-liquidation is required to enforce a valid injunction, where liquidation occurred because of a clerical or typographical error in the injunctive order, where re-liquidation may be required to challenge Commerce’s liquidation instruction, or where despite liquidation the issue has ongoing legal consequences related to the possible revocation of the underling antidumping order.82 In American Signature, Inc. v. United States,83 the Federal Circuit reversed the CIT’s denial of a preliminary injunction against liquidation, finding that the lower court’s reasoning that the Shinyei re-liquidation remedy undercut respondent’s contention that it would suffer irreparable harm if its entries were liquidated. The Federal Circuit also reversed the lower court’s decision that Commerce may correct ministerial errors in its final determination through Customs’ instructions. The Federal Circuit reasoned that Commerce’s regulations, as interpreted by Commerce itself, require the correction of ministerial errors within thirty days through an amended determination.84 Incorporating ministerial error corrections into liquidation instructions would convert the usual 1581(c) challenges into 1581(i) residual jurisdiction challenges, which the Court found to be unreasonable.85 In reviewing an ITC decision, the Federal Circuit in Diamond Sawblades Mfrs. Coal. v. United States86 sustained the CIT’s initial remand to the Commission under an abuse of discretion standard. The Federal Circuit reasoned that although the CIT had stated at times that the ITC’s negative threat determination was not supported by substantial evidence, the purpose of its initial remand was to request that the ITC provide additional reasoning to support its determination. On remand, the composition of the International Trade Commission changed, and the two new Commissioners joined the original dissent in finding a threat of material injury, which then became the Commission determination. 77. Id. at 1324 (emphasis added). 78. Id. at 1324. 79. Agro Dutch Indus. Ltd. v. United States, 589 F.3d 1187 (Fed. Cir. 2009). 80. Id. at 1189-90. 81. Id. at 1191-92. 82. Id. 83. American Signature, Inc. v. United States, 598 F.3d 816 (Fed. Cir. 2010). 84. Id. at 827. 85. Id. at 825. 86. Diamond Sawblades Mfrs. Coal. v. United States, 612 F.3d 1348, 1358 (Fed. Cir. 2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 90 THE INTERNATIONAL LAWYER Both the CIT and the Federal Circuit sustained the affirmative remand determination as having addressed the further explanations requested.87 2. Court of International Trade Decisions Like the Federal Circuit, the CIT’s jurisprudence regarding injunctions and liquidation evolved over 2010. In Ames True Temper v. United States,88 the Court declined to order reliquidation of entries that were deemed liquidated by operation of the six-month statutory deemed liquidation provision when the plaintiff failed to serve the injunction. Later in the year, however, in Clearon Corp. v. United States,89 the Court, in keeping with the Federal Circuit’s decision in Agro Dutch, held that deemed liquidation, even if caused by plaintiff’s failure to serve the injunction, did not moot plaintiff’s claims. The Court, instead, modified the injunction to eliminate the service requirement. In NSK Ltd. v. United States90 and NSK Bearings Europe Ltd. v. United States,91 the Court denied injunctions against liquidation on the grounds that plaintiffs’ claim against Commerce’s zeroing practice had no likelihood of success on the merits. In SKF USA Inc. v. United States, the Court found that Commerce’s policy to issue liquidation instructions within fifteen days after publication of an administrative review was unlawful, considering that plaintiff’s may appeal the Commerce determination within thirty days may deprive plaintiffs of their right to judicial review.92 The CIT also had occasion to review Commerce’s implementation of WTO decisions. In Andaman Seafood Co. v. United States,93 the Court upheld Commerce’s decision to give only prospective effect to its antidumping decision, which was issued to bring the United States into compliance with its WTO commitments. Regarding the perennial issue of zeroing, the Court, in Dongbu Steel Co. Ltd. v. United States,94 affirmed Commerce’s continuation of zeroing in administrative reviews, despite its adoption of the offsetting methodology in original investigations. The Court rejected plaintiff’s argument that Commerce’s dichotomous interpretation of the same statutory provision, to mean one thing in administrative reviews and another in original investigations, was unsustainable.95 Continuing its review of whether countervailing duty law may be applied to non-market economies (including China) without any change in Commerce’s antidumping practice regarding non-market economies, the CIT in GPX International Tire Corp. v. United States,96 found that Commerce must forgo imposition of countervailing duties because its remand determination failed to clearly demonstrate to what degree double-counting occurs when NME antidumping remedies are imposed. The issue is now on appeal to the 87. Id. at 1360-61. 88. Ames True Temper v. United States, 700 F. Supp. 2d 1352 (Ct. Int’l Trade 2010). 89. Clearon Corp. v. United States, 717 F. Supp. 2d 1366 (Ct. Int’l Trade 2010). 90. NSK Ltd. v. United States, 2010 WL 4055932 (Ct. Int’l Trade, Oct. 15, 2010). 91. NSK Bearings Europe Ltd. v. United States, 2010 WL 4055929 (Ct. Int’l Trade, Oct. 15, 2010). 92. SKF USA Inc. v. United States, 675 F. Supp. 2d 1264 (Ct. Int’l Trade 2009). 93. Andaman Seafood Co. v. United States, 675 F. Supp. 2d 1363 (Ct. Int’l Trade 2010). 94. Dongbu Steel Co. Ltd. v. United States, 677 F. Supp. 2d 1353 (Ct. Int’l Trade 2010). 95. Id. at 1363. 96. GPX Int’l Tire Corp. v. United States, 715 F. Supp. 2d 1337 (Ct. Int’l Trade 2010); 2010 WL 3835022 (Ct. Int’l Trade, Oct. 1, 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL TRADE 91 Federal Circuit, and concurrently a WTO panel report finding Commerce methodology to be WTO-consistent on appeal to the WTO Appellate Body.97 Regarding countervailing duties and adverse facts available, the Court in United States Steel Corporation v. United States,98 found that Commerce’s decision not to apply adverse facts available when the Indian national and state governments failed to respond to the questionnaire, but instead to rely on the respondent company’s reported benefits under the governmental programs in question, was consistent with the statute. IV. Section 337 The number of complaints filed at the U.S. International Trade Commission (ITC) in 2010 broke all records, with fifty-one investigations instituted in the fiscal year.99 This wellspring of new cases brought major developments regarding ITC practice and precedent. Three such developments are described below. A. LITIGATION EXPENSES AS “EXPLOITATION” OF INTELLECTUAL PROPERTY The genesis of Section 337 as a trade statute, as opposed to one for enforcement of intellectual property rights, explains the importance attached to the requirement that the relief provided by the statute be available only to entities maintaining an industry in the United States.100 Indeed, the domestic industry requirement is imposed to prevent those “who have no contact with the United States other than owning . . . intellectual property rights from utilizing section 337.”101 As the United States continues to move further from an economy based on manufacturing to one based on information, however, to establish a Section 337 violation, complainants rely less on expenditures involving production of articles and more on those that “exploit” their intellectual property.102 With the increased use of 19 U.S.C. §1337(a)(3)(C), ambiguities have arisen regarding the parameters of this subsection, such as whether litigation activities alone constitute “exploitation” of intellectual property, especially when offered by a non-practicing entity (“NPE”). The Commission clarified this issue in Coaxial Cable Connectors & Components Thereof & Products Containing Same, determining that litigation or any other activities may demonstrate the existence of a domestic industry under 19 U.S.C. §1337(a)(3)(C), but only if: (1) the activities relate to licensing; (2) the activities relate to the patents at issue; and (3) the 97. Panel Report, United States–Definitive Antidumping and Countervailing Duties on Certain Products from China, WT/DS379/R (Oct. 22, 2010), available at http://docsonline.wto.org:80/DDFDocuments/t/WT/DS/ 379R-01.doc; Notification of an Appeal by China under Article 16.4 and Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), and under Rule 20(1) of the Working Procedures for Appellate Review, WT/DS379/6 (Dec. 6, 2010), available at http://docsonline.wto.org:80/DDF Documents/t/wt/ds/379-6.doc. 98. U.S. Steel Corp. v. United States, 2009 WL 5125921 (Ct. Int’l Trade, Dec. 30, 2009). 99. See Section 337 Statistics, U.S. INT’L TRADE COMM’N, http://www.usitc.gov/press_room/337_stats.htm (last visited Dec. 7, 2010). 100. See Certain Microsphere Adhesives, Process for Making Same, & Prods. Containing Same, Including Self-Stick Repositionable Notes, USITC Pub. 2949, Inv. No. 337-TA-366, Comm’n Op. at 13-14 (Jan. 1996). 101. Id. at 14. 102. See 19 U.S.C. § 1337(a)(3)(C) (2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 92 THE INTERNATIONAL LAWYER complainant can document costs for those activities.103 Mere patent ownership and patent infringement litigation is not enough.104 The Commission also clarified that, “in assessing whether the domestic industry requirement has been met, we will also consider licensing activities for which the sole purpose is to derive revenue from existing production.”105 Thus, in clarifying the outer limits of “exploitation,” the Commission indicated that the business model of NPEs is not a bar to establishing domestic industry, and provided NPEs with a road map to do so using their own (non-manufacturing) activities, as opposed to the production activities of their licensees. Practitioners can take at least two lessons from Coaxial Cable Connectors. First, although the Commission opinion provides a means by which NPEs may satisfy the domestic industry requirement, the opinion does not give them carte blanche to file complaints at the ITC, as exemplified in the remand finding no domestic industry.106 Second, based on the numerous pages of annotated attorney billing in the remand opinion,107 the nexus component will likely be strictly enforced, requiring expenses to be “broken down into their constituent parts,”108 particularly when the complainant is an NPE. B. MARKMAN DECISIONS AT THE COMMISSION Although the United States Supreme Court issued its opinion in Markman v. Westview Instruments in 1996,109 it was not until the 2001-2003 period that Administrative Law Judges (“ALJs”) at the ITC began issuing Markman decisions, setting forth constructions of disputed patent claim terms in advance of a final Initial Determination (“ID”).110 The expedited pace of investigations and the absence of juries to educate have factored into the limited use of Markman decisions at the ITC. Today, however, four of the six ALJs— Chief Judge Luckern and Judges Bullock, Essex, and Gildea—have held Markman hearings, a number of which occurred in 2010. Although most Section 337 investigations still do not include Markman decisions, discussions over whether to include Markman hearings occur more regularly. Five of the six ALJs now address Markman issues in their Ground Rules. As Markman considerations become more integrated into ITC practice, one outstanding question has been whether such decisions by an ALJ should be handled via an ID or an order.111 The Commission resolved this question in Certain Mobile Telephones & Wireless Communication Devices Featuring Digital Cameras, and Components Thereof.112 In that investigation, on June 22, 2010, Chief Judge Luckern issued his first Markman decision in the form of an 103. Inv. No. 337-TA-650, Comm’n Op. at 44, 54 (Apr. 14, 2010) (Pub. Version). 104. Id. at 45-46. 105. Id. at 50 (emphasis added). 106. See Coaxial Cable Connectors, Inv. No. 337-TA-650, Remand Initial Determination (“ID”), at 25 (June 15, 2010) (Pub. Version). 107. Id. at 19-25. 108. See Coaxial Cable Connectors, Inv. No. 337-TA-650, Comm’n Op. at 54. 109. Markman v. Westview Instruments, 517 U.S. 370 (1996) (explaining that patent claim construction was a matter of law for the judge to decide rather than a question of fact for a jury). 110. Judge TERRILL was the first to conduct Markman hearings at the ITC. See Peter Kimball, Finding The Time To Be More Efficient: Markman Hearings And Appeals In Section 337 Proceedings, 21 337 REPORTER 101, 101 n.4 (2005). 111. Id. at 107-08. 112. Inv. No. 337-TA-703, Comm’n Notice, at 2 (Oct. 20, 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL TRADE 93 ID.113 On October 20, 2010, the Commission disagreed with the Chief Judge’s designation, determining that his ruling would be treated as an order.114 Accordingly, the Commission would not consider the merits of the claim constructions until the Commission had before it the final ID for the investigation. Specifically, the Commission held that: Commission rule 210.42 does not include claim construction in the list of issues that must be decided in the form of an initial determination. Nor is claim construction properly the subject of a motion for summary determination under Commission rule 210.18 because claim construction, standing alone, is not an “issue” or “any part of an issue” within the meaning of that rule. While the Commission finds that the rules are unambiguous, to the extent interpretation is required, the Commission determines in its discretion and in the interest of the expeditious conclusion of section 337 investigations that a ruling on claim construction is properly issued in the form of an order.115 Although immediate Commission review of a Markman decision is not readily available under the Commission’s dictates in Mobile Telephones,116 the ruling allows an ALJ to base claim constructions on a full evidentiary record. Moreover, the Commission’s determination that the proper mechanism for a Markman decision is an order, rather than an ID, increases the likelihood that the ITC can continue setting shorter target dates for investigations.117 C. PROPOSED CHANGES TO COMMISSION RULES GOVERNING PUBLIC INTEREST Newly proposed changes to Commission Rules of Practice and Procedure in 2010 may boost the role of public interest in Section 337 actions. On October 1, 2010, the Commission published a Notice of Proposed Rulemaking (“NPRM”) in the Federal Register, indicating that it was seeking to amend its rules as they relate to the public interest.118 The stated goal for these proposed changes is to “aid the Commission in identifying investigations that require further development of public interest issues in the record, and to identify and develop information regarding the public interest at each stage of the investigation.”119 Under the current framework, the Commission may consider public interest only after it finds a violation and after it has identified an appropriate remedy.120 Moreover, the current rules do not allow an ALJ to take evidence on public interest absent a directive from the Commission.121 The public interest has always been an important component of any Section 337 investigation. Indeed, Congress mandated that “the public interest must be paramount in the administration of this statute.”122 The Commission cannot issue a remedy if it adversely 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. Id. Id. Id. See 19 C.F.R. § 210.24 (2010). See Jenna Greene, Welcome to Patent Law’s Hottest Venue, NAT’L L.J., Dec. 13, 2010, at 1. 75 Fed. Reg. 60671 (Oct. 1, 2010). Id. (emphasis added). Id. at 60673; see 19 U.S.C. §§ 1337 (d)(1), (f)(1) (2010). 19 C.F.R. § 210.50(b)(1). S. REP. NO. 1298, at 193 (1974). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 94 THE INTERNATIONAL LAWYER affects “the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and[/or] United States consumers.”123 Although public interest considerations have impinged upon the issuance of a remedy in only a handful of investigations, the NPRM reflects the view that the proposed changes are “necessary” for the effective future administration of the statute.124 Comments on the proposed rules were due on November 30, 2010, and the Commission received a number of responses.125 While several submissions laud the goals of the NPRM, the comments also reveal concern as to whether the current proposal was effective. The Commission will review the comments and decide whether to move forward with this rule-changing initiative. 123. 19 U.S.C. §§ 1337 (d)(1), (f)(1). 124. 75 Fed. Reg. at 60,671. 125. Id. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Arbitration STEVEN SMITH, DAVID FOSTER, MARCUS QUINTANILLA, IVANA CINGEL, ROBIN DEVAUX, SPENCER JONES, KEVIN RUBINO, JUSTIN MATES, BENJAMIN JONES, AMAL BOUCHENAKI, MICHAEL RADINE, AND SOLOMON EBERE* I. Introduction The first section of this survey examines significant decisions from U.S. courts in 2010 that will be of interest to practitioners in the field of international commercial arbitration. In particular, the U.S. Supreme Court issued three noteworthy decisions construing the Federal Arbitration Act (FAA) and addressing whether issues concerning arbitrability were for the courts or the arbitrators to decide. There were also several noteworthy decisions addressing the application of arbitration clauses to non-parties, the status of “manifest disregard of the law” as a ground for vacatur of arbitral awards, and the availability of injunctive relief and discovery in aid of arbitration. A number of courts vacated arbitration awards. In another noteworthy development with potentially far-reaching implications, the English Court of Appeal held that an arbitration clause requiring the parties to appoint only members from an identified community is discriminatory, and thus void. The French Cour de Cassation, on the other hand, overturned a decision setting aside an International Chamber of Commerce partial award on the grounds that the arbitral tribunal had been irregularly constituted. The second section of this survey looks at major developments from 2010 in the field of investment treaty arbitration. Important jurisdictional decisions included the provisional application of the Energy Charter Treaty in the Yukos shareholder cases, as well as the adoption by many tribunals of an objective definition of “investment” under the ICSID Convention. In awards on the merits, several tribunals addressed issues relating to fair and equitable treatment claims, including the issue of legitimate expectations, and one tribunal considered an argument raising protection of human rights under the defense of necessity. There were also several controversial annulment decisions, including one decision finding manifest excess of powers for disregard of the applicable law and another * Steven Smith and David Foster are partners at O’Melveny & Myers LLP. Marcus Quintanilla, Ivana Cingel, Robin Devaux, Spencer Jones, Kevin Rubino, Justin Mates, and Benjamin Jones are all attorneys with O’Melveny & Myers LLP. Amal Bouchnaki and Michael Radine are attorneys at Gibson, Dunn, & Crutcher LLP and contributed to the section on Arbitration Developments in European Courts. Solomon Ebere is a Georgetown Global Law Scholar and contributed to the section on Investor-State Disputes. 95 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 96 THE INTERNATIONAL LAWYER finding insufficient disclosure of conflicts of interest, as well as several decisions on challenges to appointment of counsel and requests for provisional measures. In other developments, the United Nations Commission on International Trade Law adopted the revised United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, while the International Bar Association adopted the revised IBA Rules on the Taking of Evidence in International Arbitration. Hong Kong, Singapore, and Ireland adopted new arbitration laws. II. Arbitration Developments in U.S. Courts A. INTERPRETATION AND ENFORCEMENT OF ARBITRATION CLAUSES 1. Challenges to Validity of the Arbitration Agreement In Rent-A-Center West, Inc. v. Antonio,1 the U.S. Supreme Court once again refined the law on issues of arbitrability and whether such issues are for the arbitrators or the courts to decide. The parties entered into a stand-alone agreement to arbitrate that contained a “delegation clause” providing that the arbitrator “shall have exclusive authority to resolve any dispute relating to the. . .enforceability. . .of [the] Agreement including. . .any claim that all or any part of [the] Agreement is void or voidable.”2 In light of this clause, the Supreme Court held that the question of whether the arbitration agreement was unconscionable (and thus unenforceable) was a question for the arbitrator to decide.3 Noting that parties can agree to arbitrate “gateway” questions of arbitrability, the Court considered whether the delegation clause was valid under FAA section two.4 The Court distinguished two types of validity challenges—those that challenge the contract as a whole, and those that challenge the agreement to arbitrate itself.5 Only the latter are reserved to the courts; if a party challenges the contract as a whole, a court must refer the issue of validity to arbitration.6 Because the defendant sought to enforce the provision of the parties’ arbitration agreement that gave the arbitrators the exclusive authority to resolve any dispute relating to enforceability, while the plaintiff’s unconscionability challenge was directed to the validity of the arbitration agreement as a whole, the delegation provision had to be enforced and the validity question was for the arbitrators to decide.7 That the parties’ agreement was a stand-alone agreement to arbitrate was of no consequence: “Application of the severability rule does not depend on the substance of the remainder of the contract.”8 1. 2. 3. 4. 5. 6. 7. 8. 130 S. Ct. 2772 (2010). Id. at 2777. Id. at 2775. Id. at 2777-78. Id. at 2778. Id. Id. at 2779. Id. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ARBITRATION 97 2. Disputes Covered by the Arbitration Agreement In Granite Rock Co. v. International Brotherhood of Teamsters,9 the Supreme Court addressed whether courts or arbitrators should determine the date on which an agreement to arbitrate was formed in the context of a dispute regarding when a union ratified a collective bargaining agreement (CBA) containing the arbitration clause.10 In reversing the court of appeals, the Court explained that the question of when the CBA was ratified (and thus formed) required judicial resolution because the date of ratification—either July 2004 or August 2004—determined whether the parties had consented to arbitrate claims concerning a strike in July.11 The federal policy in favor of arbitration did not compel a different result: Supreme Court precedent has “never held that this policy overrides the principle that a court may submit to arbitration ‘only those disputes. . .that the parties have agreed to submit.’”12 Moreover, the Court explained, the ratification date dispute did not “arise under” the CBA, because the date determined whether the CBA had even been formed when the acts giving rise to the claims took place.13 3. Parties Covered by the Arbitration Agreement Two U.S. courts of appeal evaluated the applicability of arbitration clauses to non-signatories. In Todd v. S.S. Mutual Underwriting Association (Bermuda),14 the Fifth Circuit held that non-signatories to arbitration agreements may sometimes be compelled to arbitrate. Citing the Supreme Court’s decision in Arthur Anderson LLP v. Carlisle,15 the Fifth Circuit concluded that “Carlisle has called into question [the Circuit’s prior holding] . . . that direct action plaintiffs cannot be required to arbitrate as third party beneficiaries of insurance contracts.”16 Accordingly, the Fifth Circuit remanded the case to the district court for further consideration.17 In Baker & Taylor, Inc. v. AlphaCraze.Com Corp.,18 the Second Circuit rejected an unusual motion filed by non-signatory defendants who sought to compel arbitration between the signatories but not participate in the arbitration themselves. In reversing the district court’s decision and reinstating the claims against the non-signatory defendants, the Second Circuit held that, because the defendants had disclaimed any right to arbitration under the governing agreement, they could not rely on the arbitration clause to compel the signatories to arbitrate.19 9. 10. cause 11. 12. 13. 14. 15. 16. 17. 18. 19. 130 S. Ct. 2847 (2010). Although the case arose under federal labor law, the Supreme Court relied upon FAA precedents “bethey employ the same rules of arbitrability that govern labor cases.” Id. at 2857 n.6. Id. at 2860-61. Id. at 2859. Id. at 2861. 601 F.3d 329 (5th Cir. 2010). 129 S. Ct. 1896 (2009). Todd, 601 F.3d at 335. Id. at 336. 602 F.3d 486 (2d Cir. 2010). Id. at 491-92. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 98 THE INTERNATIONAL LAWYER B. ENFORCEMENT OF AWARDS 1. U.S. Decisions Addressing the Scope of Arbitrators’ and Courts’ Authority In Stolt-Nielsen v. AnimalFeeds International Corp.,20 the Supreme Court addressed the comparatively novel issue of whether class arbitration was contemplated by a standard arbitration clause. After the plaintiff filed a demand for class arbitration, the parties stipulated that their arbitration clause was “silent” on whether class arbitration was permissible and that they had not reached any agreement on the issue of class arbitration.21 The parties submitted the question of whether such arbitration was permissible to a panel of three arbitrators who were to follow the AAA’s Supplemental Rules for Class Arbitration.22 The panel considered several published arbitration awards permitting class arbitration where the arbitration clause was silent, as well as the plaintiff’s argument that public policy favored the construction of arbitration clauses to permit class arbitration, and issued a partial award construing the parties’ arbitration clause to permit class arbitration.23 The Supreme Court held that the award should be vacated because the arbitrators had “exceeded [their] powers” under FAA section 10(a)(4),24 which applies where an arbitrator “strays from interpretation and application of the agreement and effectively ‘dispense[s] his own brand of industrial justice.’”25 “Because the parties [had] agreed [that] their [contract] was ‘silent’” on the subject of class arbitration, the Court found that “the arbitrators’ proper task was to identify the rule of law that governs in that situation”26 and look to the “default rule” that would apply under either the FAA or one of the two bodies of law that the parties had argued applied to their contract.27 The Court found that the arbitration panel had instead “proceeded as if it had the authority of a common-law court to develop what it viewed as the best rule to be applied” and “simply imposed its own [view] of sound policy” regarding class arbitration.28 The Court emphasized that the purpose of the FAA is to give effect to the parties’ intent and to enforce “private agreements to arbitrate. . .according to their terms.”29 Relying on these principles, the Court concluded that “[a] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”30 The Court further held that arbitrators may not infer an implicit agreement to authorize class arbitration “solely from the fact of the parties’ agreement to arbitrate. . .because class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.”31 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 130 S. Ct. 1758 (2010). Id. at 1765-66. Id. Id. at 1768-69. Id. at 1767-68. Id. at 1767. Id. at 1768. Id. Id. at 1768-70. Id. at 1773-76. Id. at 1782. Id. at 1775-76. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ARBITRATION 99 2. Other Enforcement Decisions In Polimaster Ltd. v. RAE Systems, Inc.,32 the Ninth Circuit vacated a district court’s confirmation of an arbitral award after concluding that it was the result of procedures inconsistent with the parties’ agreement. The arbitration clause had provided for arbitration at “the defendant’s [site].”33 Polimaster, a Belarusian company, filed suit against RAE Systems, which is based in California, and agreed to arbitrate the dispute in California as provided in the arbitration clause.34 But when RAE submitted counterclaims, Polimaster argued that they could only be heard in Belarus, the “defendant’s [site]” as to those claims.35 The arbitrator concluded that “defendant,” as used in the arbitration clause, is the defendant on the initial complaint.36 But the Ninth Circuit disagreed, finding that a defendant is simply one who defends another party’s claim for relief.37 It therefore concluded that the contract was unambiguous in providing that the counterclaims against Polimaster must be arbitrated in Belarus.38 In PMA Capital Insurance Co. v. Platinum Underwriters Bermuda, Ltd.,39 the Third Circuit affirmed a district court’s vacatur of an arbitral award because the arbitrators had exceeded their powers in issuing an award that was completely irrational. In that case, the party that filed for arbitration had merely sought a declaration about the proper treatment of certain payments under the parties’ agreement.40 Instead, in a one-page award, the arbitrators awarded $6 million in damages and ordered that the relevant provision be removed from the parties’ agreement.41 The district court and Third Circuit concluded that this relief was “completely irrational.”42 Two of the three arbitrators who presided over the PMA Capital arbitration also presided over a related arbitration in which they failed to disclose their involvement in PMA Capital.43 The arbitral award in that related case was also vacated by a district court based upon a finding of “evident partiality” on the part of the two PMA Capital arbitrators.44 By serving on both arbitral panels, the arbitrators “could receive ex parte information,” “be influenced by recent credibility determinations,” and “influence each other’s thinking” on relevant issues.45 Thus, their failure to disclose their material relationship to the related arbitration justified vacatur.46 32. 623 F.3d 832 (9th Cir. 2010). 33. Id. at 834. 34. Id. 35. Id. at 835. 36. Id. 37. Id. at 838. 38. Id. 39. 2010 WL 4409655 (3d Cir. Nov. 8, 2010). 40. PMA Capital Ins. Co. v. Platinum Underwriters Berm., Ltd., 659 F. Supp. 2d 631, 637-38 (E.D. Pa. 2009). 41. PMA Capital, 2010 WL 4409655, at *1. 42. Id. at *2. 43. Scandinavian Reins. Co. v. St. Paul Fire & Marine Ins., 2010 WL 653481 (S.D.N.Y. 2010). 44. Id. at *9. 45. Id. at *8. 46. Id. at *9. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 100 THE INTERNATIONAL LAWYER 3. Status of “Manifest Disregard of the Law” Following Hall Street It remains unsettled whether judicially created grounds not expressly set forth in the FAA—including manifest disregard of the law and complete irrationality—continue to be valid grounds for vacatur of arbitral awards following the Supreme Court’s 2008 decision in Hall Street Associates, L.L.C. v. Mattel, Inc.47 The answer will likely depend on whether “manifest disregard” and “complete irrationality” are deemed extra-statutory grounds for vacatur—which would call their viability into doubt—or whether they instead refer collectively to the grounds set forth in section 10 of the FAA, or are merely shorthand for, or a gloss on, FAA sections 10(a)(3)-(4), which authorize vacatur when the arbitrators are “guilty of misconduct” or “exceed[ ] their powers.” The Supreme Court has declined to resolve this issue,48 and circuit courts remain divided. The Second Circuit previously affirmed the continued viability of “manifest disregard” on the statutory “shorthand” theory, indicating that this standard is a “judicial gloss on the specific grounds for vacatur enumerated in section 10 of the FAA.”49 But, that decision was reversed and remanded on separate grounds by the Supreme Court.50 A subsequent Second Circuit case merely acknowledged Stolt-Nielsen’s findings, stated that Hall Street had placed “manifest disregard . . . into some doubt,” and concluded that “manifest disregard” was inapplicable on the facts of that case, without settling the issue.51 The Ninth52 and Sixth53 circuits have held that “manifest disregard” remains a viable ground for vacatur, while the Fourth54 and Tenth55 circuits have applied the standard without squarely addressing its continued viability. In contrast, the Fifth,56 Eighth,57 and Eleventh58 circuits have held that it is no longer a viable ground. The First Circuit stated in dicta in one opinion that Hall Street abolished “manifest disregard,” but in a subsequent opinion vacated an award based on the manifest disregard standard without discussing Hall Street.59 C. AVAILABILITY OF INJUNCTIVE RELIEF IN AID OF ARBITRATION Several federal courts have held that courts may not grant interim relief in connection with an arbitration falling under the New York Convention.60 But the Ninth Circuit held in Toyo Tire Holdings of Americas, Inc. v. Continental Tire North America, Inc. that a district court may provide “interim injunctive relief on arbitrable claims i[f] necessary to preserve 47. 552 U.S. 576 (2008). 48. Stolt-Nielsen, 130 S. Ct. at 1768 n.3. 49. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 548 F.3d 85 (2d Cir. 2008). 50. Stolt-Nielsen, 130 S. Ct. at 1758. 51. T.Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329 (2d Cir. 2010). 52. Comedy Club Inc. v. Improv W. Assocs., 553 F.3d 1277 (9th Cir. 2009); see also Lagstein v. Certain Underwriters at Lloyd’s, 607 F.3d 634 (9th Cir. 2010). 53. Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. App’x 415 (6th Cir. 2008). 54. Raymond James Fin. Servs., Inc. v. Bishop, 596 F.3d 183 (4th Cir. 2010). 55. DMA Int’l, Inc. v. Qwest Commc’ns Int’l, Inc., 585 F.3d 1341 (10th Cir. 2009). 56. Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009). 57. Med. Shoppe Int’l, Inc. v. Turner Invs., Inc., 614 F.3d 485 (8th Cir. 2010). 58. Frazier v. CitiFinancial Corp., LLC, 604 F.3d 1313 (11th Cir. 2010). 59. Compare Ramos-Santiago v. UPS, 524 F.3d 120 (1st Cir. 2008), with Kashner Davidson Sec. Corp. v. Mscisz, 531 F.3d 68 (1st Cir. 2008). 60. See, e.g., Simula, Inc. v. Autliv Inc., 175 F.3d 716, 726 (9th Cir. 1999); I.T.A.D. Assocs. v. Podar Bros., 636 F.2d 75, 77 (4th Cir. 1981); McCreary Tire & Rubber Co. v. CEAT, 501 F.2d 1032, 1038 (3d Cir. 1974). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ARBITRATION 101 the status quo and the meaningfulness of the arbitration.”61 The Ninth Circuit distinguished an earlier case (Simula, Inc. v. Autoliv Inc.) where it had found that injunctive relief can be issued only by the arbitrator when parties have agreed to arbitration.62 But unlike Simula, the Toyo Tire case did not involve changing the status quo through injunctive relief. The Ninth Circuit also noted that Article 23(2) of the ICC Rules explicitly permits interim judicial relief if proper conditions are met.63 D. AVAILABILITY OF DISCOVERY IN AID OF ARBITRATION—28 U.S.C. § 1782 The case law is unsettled on whether evidence can be obtained in aid of an international arbitration pursuant to 28 U.S.C. § 1782, which authorizes district courts to compel discovery “for use in a proceeding in a foreign or international tribunal.”64 In a series of decisions granting requests under Section 1782 in connection with an arbitration between Ecuador and Chevron Corporation, several district courts recently held that, in contrast to an arbitral tribunal established by private parties, an arbitral tribunal established pursuant to a bilateral investment treaty does qualify as a “foreign or international tribunal” for purposes of Section 1782.65 But, in In re Caratube International Oil Co., although the district court assumed that arbitration under a bilateral investment treaty could fall within Section 1782, it nonetheless exercised its discretion to deny the petition.66 The court reasoned that granting a party’s petition for discovery from a non-party would interfere with the parties’ bargained-for expectations concerning the arbitration process, including the adoption of the IBA Rules on the Taking of Evidence in International Commercial Arbitration.67 III. Arbitration Developments in European Courts A. ENGLISH COURT OF APPEAL In Jivraj v Hashwani,68 the Court of Appeal held that an arbitration clause requiring the parties to appoint as arbitrators only members from the Ismaili community is discriminatory and thus void. The party appointing a non-Ismaili arbitrator argued that the arbitration clause violated the Employment Equality (Religion and Belief) Regulations 2003 (the “Regulations”) and the Human Rights Act 1998. The court agreed, observing that the 61. 609 F.3d 975, 981 (9th Cir. 2010). 62. See Simula, Inc., 175 F.3d at 726. 63. Toyo Tire Holdings, 609 F.3d at 980-81. 64. 28 U.S.C. § 1782(a)(2010). 65. See In re Chevron Corp., 709 F. Supp. 2d 283, 291 (S.D.N.Y. 2010); Chevron Corp. v. Shefftz, No. 10mc-10352-JLT, 2010 WL 4985663, at *3 (D. Mass. Dec. 7, 2010); In re Chevron Corp., No. 10-CV-2989AW, 10-CV-2990-AW, 2010 WL 4880378, at *3 (D. Md. Nov. 24, 2010); In re Veiga, F. Supp. 2d, No. 10370, 10-371, 2010 WL 4225564, at *8 & n.12 (D.D.C. Oct. 20, 2010), appeal dismissed, No. 10-7145, 2010 WL 5140467, at *1 (D.C. Cir. Dec. 17, 2010). Cf. In re Winning (HK) Shipping Co., No. 09-22659-MC, 2010 WL 1796579, at *9 (S.D. Fla. Apr. 30, 2010) (holding that an arbitral panel established by private parties in fact satisfied § 1782 because the award was subject to court review under English arbitration law, which the court found applied to the arbitration). 66. No. 10-0285, 2010 WL 3155822, at *3 (D.D.C. Aug. 11, 2010). 67. Id. at *4. 68. Jivraj v. Hashwani, [2010] EWCA (Civ) 712 (Eng.). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 102 THE INTERNATIONAL LAWYER Regulations intended to define employment “in the broadest sense,” and would apply to all contracts to perform “services of any kind.”69 The arbitrator takes on a quasi-judicial role in doing work that is irrelevant.70 While the court recognized that the self-employed may be exempt, it found that arbitrators are only self-employed in the sense that their employer changes with each contract; they are still, in some sense, controlled by an employer.71 Although Regulation 7 exempts from the prohibition situations where the religious identity of the employee is necessary to the employment, the Court found the exemption inapplicable because the arbitration clause called for English law, which does not vary with the parties’ or arbitrators’ religion.72 Finally, the Court determined that the entire clause was void because the discriminatory element could not be severed.73 B. FRENCH COUR CASSATION DE In Tecnimont v. Avax,74 the French Cour de Cassation overturned a decision of the Paris Court of Appeal75 setting aside an ICC partial award on the grounds that the arbitral tribunal had been irregularly constituted. Avax contested the independence of the tribunal’s chair on grounds that his law firm represented affiliates of Tecnimont before and during the course of the arbitration. The Paris Court of Appeal rejected Tecnimont’s time-bar defense, found the challenge admissible, and held that the chair’s disclosure was not exhaustive and should have continued during the arbitration. Without addressing the merits, the Cour de Cassation overturned that decision on a procedural ground, striking down the court of appeal’s decision on admissibility of the challenge, and remanded Avax’s challenge for reconsideration by the court of appeal in Reims. On remand, the court of appeal in Reims will therefore have to decide anew (i) whether it is bound by the ICC Court’s decision to reject the challenge against the chair, and (ii) whether it should enforce Article 11(2) of the ICC Rules providing that challenges to arbitrators’ independence are only admissible if submitted within thirty days from the date the challenging party was informed of the facts on which the challenge is based. IV. Investor-State Disputes A. JURISDICTION AND ADMISSIBILITY 1. Provisional Application of Energy Charter Treaty In a long-awaited award on jurisdiction concerning claims against Russia under the Energy Charter Treaty (ECT), a tribunal constituted under Article 26 of the ECT held that it possessed jurisdiction to determine the claims made by three shareholders of Yukos Oil 69. Id. ¶ 13. 70. Id. ¶¶ 12, 14. 71. Id. ¶ 21. 72. Id. ¶¶ 27, 29. 73. Id. ¶ 34. 74. Cour de cassation [Cass.][supreme court for judicial matters] 1e civ., Nov. 4, 2010, Bull. civ. II, No. 0912716 (Fr.). 75. Cour d’appel [CA][regional court of appeal] Paris, 1ere ch., Feb. 12, 2009, Section C. (Fr.). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ARBITRATION 103 Corporation, even though the ECT had not been ratified by the Russian Parliament after signature.76 The tribunal analyzed Article 45 of the ECT, concerning the scope of the treaty’s provisional application, and concluded that the ECT applied provisionally in its entirety in the Russian Federation until October 19, 2009, and consequently that Russia was bound by the investor-State arbitration provisions invoked by the claimants.77 The decision on provisional application is likely to have significant implications for other potential claimants under the ECT as well as for the Russian Federation. 2. Investor Standing In Mobil Corp. v. Bolivarian Republic of Venezuela,78 the respondent challenged claimants’ standing to bring a claim on the ground that one of the claimants was a “corporation of convenience” created for the sole purpose of gaining access to ICSID jurisdiction under the Netherlands-Venezuela BIT. The tribunal rejected that argument, finding that all of the claimants were nationals of the Netherlands as defined in the BIT.79 The tribunal also rejected an argument that the corporate restructuring that led to the incorporation of the Dutch entity was an abusive manipulation of the ICSID system, although it held that it had no jurisdiction with respect to any dispute arising before the restructuring.80 3. Qualifying Investments The test for establishing what is, and is not, a qualifying “investment” under the relevant BIT and under the ICSID Convention continued to be a prominent subject of debate. In Alpha Projektholding GmbH v. Ukraine, an award was rendered on November, 8 2010, in favor of the claimant (US $5.25 million).81 One of the issues was whether the loan agreements and contracts between claimant and a Ukrainian state-owned entity constituted qualifying investments. The tribunal concluded that the claimant had made an “investment” as defined in the BIT, because, at a minimum, the claimant had a claim to money that had been given in order to create an economic value, and this was sufficient to meet the BIT’s jurisdictional requirement.82 The tribunal then considered the test for an “investment” as that term is used in the ICSID Convention.83 Observing that the Convention did not define “investment,” the tribunal criticized the test applied in Salini Construttori S.p.A. v. Kingdom of Morocco84 for 76. See Hulley Enter. Ltd. (Cyprus) v. Russian Fed’n, Interim Award on Jurisdiction and Admissibility, ¶¶ 244-398 (Perm. Ct. Arb. 2010); see also Yukos Universal Ltd. (Isle of Man) v. Russian Fed’n, Interim Award on Jurisdiction and Admissibility (Perm. Ct. Arb. 2010); Veteran Petroleum Ltd. (Cyprus) v. Russian Fed’n, Interim Award on Jurisdiction and Admissibility (Perm. Ct. Arb. 2010). 77. See, e.g., Hulley, ¶¶ 393-98. 78. ICSID Rep. Case No. ARB/07/27, Decision on Jurisdiction (June 10, 2010). 79. Id. ¶¶ 144, 160. 80. Id. ¶¶ 204-06. 81. ICSID Case No. ARB/07/16, Award (Nov. 8, 2010). 82. Id. ¶ 303. 83. Id. ¶ 310. 84. ICSID Case No. ARB/00/4, Decision on Jurisdiction, ¶ 52 (July 23, 2001). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 104 THE INTERNATIONAL LAWYER imposing requirements not found in Article 25(1) of the Convention, specifically that the purported investments have contributed to the host country’s economic development.85 But, in Global Trading Resources Corp. and Globex International, Inc. v. Ukraine, a tribunal held that the concept of an investment could not be defined solely by reference to party intent; it had to adhere to an objective definition within the ICSID Convention framework.86 The tribunal held that the claimants’ case failed because purchase and sale contracts were not qualifying investments within the meaning of the relevant BIT,87 and also because they could not qualify as an investment under Article 25(1) of the ICSID Convention.88 In reaching this decision, the Global Trading Resources tribunal relied on the recent award in Saba Fakes v. Republic of Turkey,89 where the tribunal concluded that the ICSID Convention provided an autonomous definition of an “investment” that could not be altered by contract or treaty for the purposes of establishing ICSID jurisdiction.90 Significantly, while accepting that the ICSID Convention required an investment to satisfy certain objective criteria, the Saba Fakes tribunal specifically rejected the criterion of contribution to the host state’s development.91 The tribunal also held that the claimant did not hold legal title over the temporary share certificates in the Turkish investment and consequently did not have an investment within the terms of the BIT or the ICSID Convention.92 In the jurisdictional challenge to the Yukos shareholders referred to above, Russia argued that the claimants were only nominee shareholders in Yukos Oil Corporation and that their shares did not constitute a qualifying investment.93 Russia also argued that there was no investment because no injection of foreign capital into the state had occurred.94 The tribunal found that simple legal ownership was sufficient for the purposes of the treaty, and that there was no basis in the ECT for limiting “investments” to injections of foreign capital.95 4. Admissibility/Premature Commencement of Arbitration The problem of whether a claim is inadmissible or fails for lack of jurisdiction if the claimant fails to comply with the correct dispute resolution procedure arose in Burlington Resources v. Republic of Ecuador.96 The claimant initiated ICSID arbitration under the U.S.–Ecuador BIT, but the respondent objected to jurisdiction over certain claims for 85. Id. ¶ 311-12. 86. Global Trading Res. Corp. v. Ukraine, ICSID Case No. ARB/09/11, Award, ¶ 43 (Dec. 1, 2010) (citing numerous authorities including Salini, ICSID Case No. ARB/00/4). 87. Id. ¶ 51. 88. Id. ¶ 56. 89. ICSID Case No. ARB/07/20, Award (July 14, 2010). 90. Id. ¶ 109 (citing Joy Mining v. Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction, ¶¶ 49-50 (Aug. 6, 2004)). 91. Saba Fakes, ¶¶ 110-11. See also LESI-Dipenta v. Algeria, ICSID Case No. AB/03/08, Award, ¶ II.13(iv) (Jan. 10, 2005); Salini, ICSID Case No. ARB/00/4 ¶¶ 50-58. 92. Saba Fakes, ¶ 135. 93. Hulley, ¶¶ 420-21. 94. Id. ¶ 422. 95. Id. ¶¶ 429-31. 96. Burlington Res. Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Jurisdiction (June 2, 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ARBITRATION 105 which claimant did not give notice or attempt negotiations for a period of six months prior to initiating arbitration, as required under the BIT.97 The tribunal found that, due to the claimant’s non-compliance, the tribunal lacked jurisdiction over the claims.98 Substantially the same issue arose in Murphy Exploration & Production Co. International v. Republic of Ecuador.99 The claimant filed a request for arbitration on March 3, 2008, under the U.S.–Ecuador BIT. Ecuador raised several objections to jurisdiction and admissibility, the most significant of which was that the claimant had not allowed a mandatory sixmonth period to pass after informing Ecuador of the alleged breach before initiating the arbitration.100 The claimant argued that the cooling-off period was merely a procedural rather than jurisdictional requirement.101 The tribunal found in favor of Ecuador and held that it had no jurisdiction over the dispute.102 In doing so, it rejected the approach taken in cases such as Lauder103 and SGS v. Pakistan,104 which had treated consultation periods as directory and procedural.105 5. Rule 41(5): Objection That a Claim Is Manifestly Without Legal Merit Two ICSID tribunals recently upheld for the first time preliminary objections made under Article 41(5) of the ICSID Arbitration Rules, which were amended in 2006 to enable tribunals to dispose of claims summarily if they are “manifestly without legal merit.” In Global Trading Resources, two U.S. poultry exporters sought damages for Ukraine’s failure to honor poultry sale and purchase contracts.106 Ukraine filed a preliminary objection under Article 41(5), and the tribunal decided that the contracts could not qualify as an investment under the ICSID Convention.107 Because the claims were without legal merit, the tribunal dismissed them pursuant to Article 41(5).108 B. DECISIONS ON THE MERITS 1. Expropriation In Kardassopoulos v. Republic of Georgia, an ICSID tribunal found that Georgia directly expropriated a Greek investor’s exclusive rights in an oil pipeline.109 The tribunal found that Georgia had failed to provide the investor due process of law.110 In defining due process, the tribunal cited the ADC tribunal’s reasoning that the legal mechanism employed “must be of a nature to grant an affected investor a reasonable chance within a 97. Id. ¶¶ 251-52. 98. Id. ¶¶ 316-18. 99. ICSID Case No. ARB/08/4, Award on Jurisdiction (Dec. 15, 2010). 100. Id. ¶ 48. 101. Id. ¶ 140. 102. Id. ¶ 157. 103. Id. ¶ 147; see also Lauder v. Czech Republic (UNCITRAL), Award ¶ 187 (Sept. 3, 2001). 104. Murphy, ¶ 148; see also SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pak., ICSID Case No. ARB/01/13, Decision on Jurisdiction, ¶ 184 (Aug. 6, 2003). 105. Murphy, ¶¶ 147, 154. 106. See Global Trading Resources, ICSID Case No. ARB/09/11. 107. Id. ¶¶ 28-29, 57. 108. Id. ¶ 58. 109. ICSID Case No. ARB/05/18 and ARB/07/15, Award, ¶ 387 (Mar. 3, 2010). 110. See id. ¶¶ 391-403. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 106 THE INTERNATIONAL LAWYER reasonable time to claim its legitimate rights and have its claims heard.”111 The tribunal found that Georgia engaged in “[b]ack-door press reports” and “opaque” dealings that had denied Kardassopoulos due process.112 2. Fair and Equitable Treatment Several tribunals addressed claims for violation of the host State’s obligation to provide fair and equitable treatment (FET) to the foreign investor. Two important issues were whether the FET standards in the relevant BITs exceeded the international minimum standard under customary international law, and the legitimate expectations of the foreign investors. In Kardassopoulos, the tribunal found that the respondent had failed to satisfy its fair and equitable treatment obligation under the Georgia–Israel BIT.113 The claimant argued that the BIT’s autonomous FET standard required a higher level of conduct than the international minimum standard.114 The tribunal agreed, interpreting the FET standard in accordance with the object and purpose of the treaty, noting the language in the preamble that encouraged the inflow and retention of foreign investment.115 The tribunal also found that claimant had a legitimate expectation that the host State would conduct itself in a “reasonably justifiable” manner.116 In Suez v. Argentine Republic, the tribunal was confronted with claims of FET violations under two BITs, one of which included the language that the obligation must be interpreted in accordance with “principles of international law.”117 The tribunal found that there was no reason to interpret the scope of either BIT provision as limited to the international minimum standard.118 The tribunal found that an important consideration for assessing the investors’ legitimate expectations is whether they “acted in reliance upon [the host state’s] laws and regulations and changed their economic position as a result.”119 In contrast, in AES Summit Generation Ltd. v. Republic of Hungary, the tribunal found that the foreign investor had no legitimate expectation that the host State would not reinstate an administrative pricing scheme for power generation.120 The AES tribunal concluded that “any reasonably informed business person or investor knows that laws can evolve in accordance with the perceived political or policy dictates of the times.”121 The tribunal stated that, under the ECT, a violation of fair and equitable treatment would be found only when a state’s acts or omissions are manifestly unfair and unreasonable.122 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. Id. ¶ 396. See also ADC v. Hungary, ICSID Case No. ARB/03/16, Award (Oct. 2, 2006). Kardassopoulos, ¶¶ 403-04. Id. ¶ 451. Id. ¶ 409. Id. ¶ 433. Id. ¶ 441. ICSID Case No. ARB/03/17, Decision on Liability, ¶ 178 (July 30, 2010). Id. ¶ 179. Id. ¶ 207. ICSID Case No. ARB/07/22, Award, ¶ 9.3.34 (Sept. 23, 2010). Id. Id. ¶ 9.3.40. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ARBITRATION 107 3. Effective Means of Asserting Claims and Enforcing Rights In Chevron Corp. v. Republic of Ecuador, the tribunal accepted Chevron’s arguments that the failure of the Ecuadorian courts to timely resolve contractual claims against the host State violated the U.S.–Ecuador BIT obligation to provide an effective means of asserting claims and enforcing rights.123 The tribunal found that the BIT obligation was a potentially less-demanding standard than the denial of justice standard under customary international law.124 The tribunal held that undue delay and manifestly unjust decisions would suffice to constitute a breach, with no requirement of government interference in judicial proceedings,125 and thus found Ecuador to be in breach of the BIT based on the failure of the Ecuadorian courts to resolve cases that had been pending for more than fifteen years.126 4. Defense of Necessity In Suez v. Argentine Republic, the tribunal addressed an argument by Argentina that its measures were justified by the defense of necessity under customary international law in order to safeguard the human right to water.127 The tribunal found: (1) that Argentina failed to satisfy the requirements of the defense, as it had other means available to safeguard its essential interests, (2) that Argentina had contributed to the situation of necessity, and (3) that the State’s human rights obligations did not trump its obligations to foreign investors under the BIT.128 C. ANNULMENT AND ENFORCEMENT ACTIONS 1. Decisions on Stays of Enforcement Following the issuance of the Kardassopoulos Award earlier this year, Georgia moved for an unconditional stay, and the investors accepted a stay subject to a condition of security.129 In making its Decision on the Stay of Enforcement of the Award, the ad hoc Committee considered the difficulty of enforcing ICSID awards in Georgia, as well as the protracted character of the underlying dispute, and conditioned the stay on Georgia’s providing an unconditional and irrevocable bank guarantee of a reputable international bank.130 Additionally, the Committee stated that a stay of enforcement during the annulment proceeding “is by no way automatic.”131 This contrasts with the decision of the ad hoc Committee in Vı́ctor Pey Casado & Fondation President Allende v. Republic of Chile, which 123. Partial Award on the Merits, ¶ 242 (Perm. Ct. Arb. 2010). 124. Id. ¶ 244. 125. Id. ¶ 248. 126. Id. ¶ 262. 127. Suez, ICSID Case No. ARB/03/17, ¶ 232. 128. Id. ¶¶ 238-42. 129. Kardassopoulos, Decision of the ad hoc Committee on the Stay of Enforcement of the Award, ICSID Case Nos. ARB/05/18 and ARB/07/15, ¶¶ 27-28 (Nov. 10, 2010). 130. Id. ¶¶ 43-45. 131. Id. ¶ 26. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 108 THE INTERNATIONAL LAWYER stated that “absent unusual circumstances, the granting of a stay of enforcement pending the outcome of the annulment proceedings has now become almost automatic.”132 2. Decisions on Applications for Annulment There were two significant (and controversial) ICSID annulment decisions this year, both involving Argentina. In Sempra Energy International v. Argentine Republic, Argentina requested annulment of a 2007 ICSID award holding that Argentina had breached the FET standard and the umbrella clause of the United States-Argentina BIT.133 The ad hoc annulment Committee annulled the award on the basis that the tribunal had disregarded the law and that this constituted a manifest excess of its powers.134 The Committee reasoned that there was a fundamental distinction to be drawn between an erroneous application of the law, which was not a ground for annulment, and a wholesale disregard for the applicable rules of law, which might constitute a ground for annulment if found to be a manifest excess of the tribunal’s powers.135 The Committee concluded that the tribunal, in failing to apply the applicable law, acted in manifest excess of powers, because it was “obvious from a simple reading of the reasons of the tribunal that it did not identify or apply Article XI of the BIT as the applicable law.”136 This decision provoked considerable debate and criticism, because it is unclear where the line should be drawn between a simple error of law, which does not permit annulment of the award, and a “manifest” error, which does. It also prompted fresh suggestions that the present annulment system under the ICSID Convention should be revised, to be replaced with a more formal, investment-law appellate system. Criticism of the annulment system was further fueled by the decision of the annulment Committee in Compania de Aguas del Aconquija S.A. v. Argentine Republic. Argentina filed an application for annulment of the Award dated August 20, 2007, based on multiple grounds under Article 52(1) of the ICSID Convention.137 Most significantly, Argentina sought annulment on the ground that the tribunal was not properly constituted, after discovering, subsequent to the rendering of the award, that one of the arbitrators was a member of the board of directors of UBS, the single largest shareholder in claimant Vivendi Universal.138 The ad hoc Committee upheld the award but was critical of the steps taken by the arbitrator to determine whether a conflict of interest might arise from her directorship of UBS.139 The Committee concluded that the relationship between UBS and the claimants 132. ICSID Case No. ARB/98/2, Decision on the Republic of Chile’s Application for a Stay of Enforcement of the Award, ¶ 25 (May 5, 2010). 133. See Sempra Energy Int’l v. Argentine Republic (U.S. v. Arg.), ICSID Case No. ARB/02/16, Decision on the Argentine Republic’s Application for Annulment of the Award, ¶ 1 (2010). 134. Id. ¶ 219. 135. Id. ¶ 173. 136. Id. ¶¶ 209-219. 137. Compania de Aguas del Aconquiga S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Decision on the Argentine Republic’s Request for Annulment of the Award rendered on 20 August 2007, ¶ 2 (Aug. 10, 2010). 138. Id. ¶ 20. 139. Id. ¶ 232. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ARBITRATION 109 had no material impact upon the decision of the tribunal—a kind of “harmless error” standard previously unfamiliar in ICSID jurisprudence.140 D. PROVISIONAL MEASURES In Quiborax S.A. v. Bolivia, the claimants initiated arbitration proceedings against Bolivia in October of 2005 alleging that the respondent had expropriated their property in breach of the Bolivia-Chile BIT. Tensions escalated between the parties, and Bolivia initiated criminal proceedings against several individuals involved in the claimants’ Bolivian operations.141 The claimants filed a request for provisional measures, seeking suspension of the Bolivian criminal proceedings and alleging impairment of their rights.142 The tribunal found that there was a clear link between the criminal proceedings and the ongoing arbitration,143 and that the Bolivian criminal proceedings posed a threat to the procedural integrity of the arbitration, particularly with respect to the claimants’ right to access evidence through potential witnesses.144 Thus, if the measures were intended to protect the procedural integrity of the arbitration, then they were by definition urgent. As a result, the tribunal concluded that the requested provisional measures were necessary,145 despite Respondent’s argument that the measure would violate Bolivia’s sovereignty.146 V. Other Developments In May of 2010, the International Bar Association (IBA) adopted the new IBA Rules on the Taking of Evidence in International Arbitration. The new rules apply to all arbitrations in which the parties agree to apply them, whether as part of new arbitration agreements, or in determining the rules of procedure in a pending or future arbitration.147 In June of 2010, UNCITRAL adopted the revised UNCITRAL arbitration rules, which went into effect on August 15, 2010. The revised arbitration rules will apply to any new arbitration agreements adopting the UNCITRAL Rules that are concluded after August 15, 2010, unless the parties have agreed otherwise.148 There have also been several noteworthy developments in national arbitration laws. Ireland passed the Arbitration Act of 2010 that incorporates the entire text of the UNCITRAL Model Law.149 The act applies to all arbitrations commenced in Ireland after the date the act came into operation and does away with the historical distinction between 140. Id. ¶ 238. 141. ICSID Case No. ARB/06/2, Decision on Provisional Measures, ¶¶ 29-32 (Feb. 26, 2010). 142. Id. ¶¶ 46-64. 143. Id. ¶ 121. 144. Id. ¶ 148. 145. Id. ¶¶ 153, 163. 146. Id. ¶ 164. 147. See IBA Announces Approval of Revised Evidence Rules, INT’L BAR ASS’N, http://www.ibanet.org/Article/ Detail.aspx?ArticleUid=AD2E4AFA-F3E5-4009-99BC-6745C8B97648 (last visited Jan. 22, 2011). 148. See Press Release, Revised UNCITRAL Arbitration Rules Adopted, U.N. Press Release UNIS/L/139 (June 29, 2010), available at http://www.unis.unvienna.org/unis/pressrels/2010/unisl139.html; UNCITRAL Arbitration Rules, art. 1(2)(2010). 149. See Arbitration Act 2010 (Act No. 1/2010) (Ir.) § 6, available at http://www.irishstatutebook.ie/2010/en/ act/pub/0001/print.html. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 110 THE INTERNATIONAL LAWYER domestic and international arbitration.150 Similarly, Hong Kong passed a new Arbitration Ordinance that adopts a single regime based on the UNCITRAL Model Law for domestic and international arbitration.151 The new Ordinance, passed in November 2010, significantly reforms arbitration law in Hong Kong but will likely not become effective until sometime in 2011. Singapore’s International Arbitration Act was also recently amended in part to provide that a court may grant interim measures in aid of arbitration irrespective of whether the arbitration is seated in Singapore.152 150. See id. §§ 3, 6. 151. See Arbitration Ordinance, No. 17/2010, (2010) (H.K.) §§ 4, 5, available at http://www.legco.gov.hk/ yr10-11/english/ord/ord017-10-e.pdf. 152. See International Arbitration (Amendment) Bill, 2009 (Bill No. 20/2009) (Sing.) § 4, available at http:// www.parliament.gov.sg/Publications/090020.pdf. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Commercial Mediation WILLIAM A. HERBERT, GIUSEPPE DE PALO, AVA V. BAKER, APOSTOLOS ANTHIMOS, NATALIA TERESHCHENKO, AND MICHAEL JUDIN* I. China On August 28, 2010, Chinese legislators passed the People’s Mediation Law to institutionalize the people’s mediation committee as the legal organization to resolve everyday disputes within local communities.1 The law states that governments from the county level and above will provide financial support for mediation and reward outstanding mediation committees and individual mediators. The law requires that only people who are “righteous, sociable, and warm-hearted” and who possess certain social and legal knowledge may become mediators. To encourage mediation as a means to resolve disputes without resorting to litigation or arbitration, the law requires courts and law enforcement officials to provide information about mediation to parties involved in disputes. The law further states that agreements reached through mediation are legally binding on the parties and may be enforced by a court should one of the parties so request.2 II. The Mediation Regulation Spectrum in Europe: Developments in Italy and Slovenia This is a special moment in alternative dispute resolution in Europe. In recent years, the mediation law landscape has undergone substantial changes motivated mainly by the 2008 “European Union Directive on Certain Aspects of Mediation in Civil and Commercial Matters” (the “Mediation Directive”). Reacting to this supranational Mediation Directive, the European Union has become a laboratory of experimentation for the development of mediation law. * William A. Herbert, Vice-Director of the Legal Affairs Department of Otsuka Pharmaceutical Co., Ltd. in Tokyo, edited this article and drafted the section on China. Giuseppe De Palo and Ava V. Baker coauthored the section on the European Union. Apostolos Anthimos authored the section on Greece. Natalia Tereshchenko authored the section on Russia. Michael Judin authored the section on South Africa. 1. According to the Chinese Ministry of Justice, “China has more than 4.9 million mediators working in more than 800,000 mediation committees.” Chinese Legislature Passes People’s Mediation Law, XINHUANEWS, Aug. 29, 2010, http://news.xinhuanet.com/english2010/china/2010-08/29/c_13467472.htm. 2. Chinese legislature passes People’s Mediation Law, XINHUANEWS (Aug. 8, 2010, 6:00 PM), http://news. xinhuanet.com/english2010/china/2010-08/28/c_13467209.htm. 111 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 112 A. THE INTERNATIONAL LAWYER THE E.U. MEDIATION DIRECTIVE By May 2011, E.U. Member States must implement cross-border mediation laws in line with the Mediation Directive. The Mediation Directive provides Member States with a flexible regulatory framework that enables them to enact a variety of mediation laws, because it sets minimum guidelines for the mediation laws of Member States. These guidelines require that Member States’ laws ensure the quality of mediation procedures by encouraging and developing quality control regulations for mediators and the training of mediators,3 that they provide for court referral to mediation,4 that they enforce settlement agreements reached at mediation,5 that they contain confidentiality procedures,6 that they provide access to judicial proceedings if the mediation should fail,7 and that they provide a means for informing the public of mediation, mediation organizations, and competent courts.8 The Mediation Directive’s general requirements give Member States the flexibility to create mediation laws that are best suited to their judicial systems and access to justice needs.9 When presented with flexible, supranational regulation, countries can enact such regulations in a variety of ways. Traditionally, the forms of regulation fall along a spectrum of pragmatic, cultural, and legalistic approaches.10 In light of the Mediation Directive, Member States are reforming or creating new mediation laws in diverse ways. The contrast between recently enacted mediation laws in Italy and Slovenia provides an example of the varied mechanisms of mediation law reform. While the Italian mediation law is highly regulated, requiring compulsory mediation in some cases, Slovenia’s mediation law has an opt-in mediation process. B. ITALY In Italy, the mediation law is an example of compulsory mediation. Italy’s March 4, 2010, Legislative Decree No. 28 (the “Decree”), requires that by March 2011 all civil disputes arising in the following areas proceed to mediation prior to gaining access to the courts: neighbor disputes (“condominio”), property rights, division of goods (“divisione”), trusts and estates, family-owned businesses, landlord/tenant disputes, loans, leasing of 3. China’s Draft Mediation Law Aims to Make Conflict Settlement a Neighborhood Issue, COMMUNIST PARTY CHINA, June 23, 2010, http://english.cpc.people.com.cn/66102/7036078.html; New Law to Make ConflictSolving Neighborhood Issue, CHINADAILY, June 22, 2010, http://www.chinadaily.com.cn/china/2010-06/22/ content_10005266.htm. 4. Nadja Alexander, Mediation and the Art of Regulation, 8 QUEENSLAND U. TECH. LAW & JUST. J. 1, 22 (2008). There are only twenty-six EU Member States subject to the Directive because Denmark opted out of the Directive. Press Release, EUROPA, European Commission calls for saving time and money in crossborder legal disputes through mediation. European Commission Calls for Saving Time and Money in Cross-border Legal Disputes Through Mediation, EUROPA, Aug. 20, 2010, http://europa.eu/rapid/pressReleasesAction.do? reference=IP/10/1060&format=HTML&aged=0&language=EN&guiLanguage=en. 5. Council Directive 2008/52/EC, art. 4, 2008 O.J. (L 136) 3. 6. Id. art. 5. 7. Id. art. 6 ¶ 2. 8. Id. art. 7. 9. Id. art. 8. 10. Id. arts. 9, 10. OF VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW MEDIATION 113 companies (“affitto di aziende”), disputes arising out of car and boat accidents, medical malpractice, libel, insurance, banking, and financial contracts.11 At first glance, the Decree appears unnecessarily strict. By forcing parties to mediate, it takes mediation outside of the realm of a consensual, party-controlled process. But the Decree was developed as a solution to extremely overcrowded courts.12 The average duration of a civil case is three and a half years and ten years to reach a final judgment on a civil appeal.13 In addition to overcrowded courts, Italy faced a “mediation paradox” where few parties agreed to mediate disputes, but of the parties that did, an overwhelming percentage reached satisfactory settlements.14 As a result, the Italian legislature wanted to increase parties’ use of mediation in civil cases. Because voluntary mediation laws did not accomplish the goal of encouraging more parties to use mediation, the legislature went a step beyond and mandated mediation for certain civil cases.15 Under the Decree, not only will mediation allow an alternative to court access, but it will also offer a guaranteed faster procedure to resolve civil disputes and thereby reduce court backlogs. In fact, the Decree requires that all mediations occur within four months, starting from the date of the request to mediate.16 This cap is in place to ensure that mandatory mediation is a true improvement, at least in speed and ease of procedure, over adjudication of civil disputes. C. SLOVENIA: GENERAL INFORMATION Unlike in Italy, mediation in Slovenia is optional and is never mandatory for civil cases.17 In 2001, the District Court of Ljubljana instituted a mediation pilot program that allowed parties to mediate their disputes voluntarily.18 The pilot program was successful in alleviating court backlogs; therefore, ten courts offered similar mediation programs to parties by 2009.19 In order to comply with the Directive, on November 19, 2009, the Slovenian National Assembly enacted the Alternative Litigation Settlement Act (“ZARRS”), a mediation law that requires all courts to enact mediation programs, works to increase awareness of mediation, and gives parties the opportunity to mediate disputes.20 ZARRS came into effect in May 2010, and as of June 15, 2010, all fifty-nine 11. Although the Directive provides a flexible framework, there are a number of requirements that countries must incorporate into their mediation laws, including these. See Council Directive 2008/52/EC, 2008 O.J. (L 136) 3. 12. Giuseppe De Palo & Penelope Harley, Mediation in Italy: Exploring the Contradictions, 21 NEGOTIATION J. 469, 469 (2005). 13. Decreto Legislativo 4 Marzo 2010, n. 28, art. 5 (It.). 14. As in other continental European countries, in Italy the “ADR movement” began in the early nineties. In those years, the Parliament began to produce general mediation laws. 15. Sergio Ciarloni, Stato attuale e prospettive della conciliazione stragiuziale [Current status and prospects of reconciliation stragiuziale], 2 RIVISTA TRIMESTRALE DI DIRITTO E PROCEDURA CIVILE 447-65 (2000) (It.). 16. Professor Giuseppe De Palo, Speech for Mediation Day in Warsaw, Poland (Oct. 21, 2010). 17. Id. 18. D.Lgs. n. 28/2010, art. 6 (It.). 19. See generally Zakon o alternativem res̆evanju sodnih sporov [ZARSS], 97/2009 [Alternative Litigation Settlement Act] (Slovn.). 20. E-mail from Slovenian Ministry of Justice to author (Oct. 21, 2010) (on file with author). The courts of first instance include forty-four county courts, eleven district courts, and four labor courts. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 114 THE INTERNATIONAL LAWYER courts of first instance offer mediation.21 Although judges can refer parties to mediation, mediation is ultimately at the parties’ election. The Slovenian mediation law gives courts the ability to refer any case that they believe would benefit from mediation, although the parties are not obligated to attend.22 Judicial referral is the means by which parties begin to engage with the mediation process, not through a mandatory law.23 According to Article 15, Section 1, the courts shall give the parties the option to use ADR, unless the judge believes that ADR is not suitable for the case.24 The one instance where the law requires parties to engage in the mediation process is if the judge orders the parties to attend a mediation information session. If a party refuses to attend this session without justification, then the absent party “shall be obliged to reimburse the other party’s expenses that arose from this hearing.”25 Though mediation is not mandatory, if the judge wants parties to learn about mediation, then the parties are obligated to attend the information session. D. DIFFERENCES BETWEEN ITALY AND SLOVENIA: MANDATORY VERSUS VOLUNTARY The most striking difference between Italy’s and Slovenia’s mediation laws is that Italy’s law mandates mediation of most civil disputes, while mediation is voluntary under Slovenia’s law. In Italy, laws that merely encouraged voluntary mediation did not alleviate court backlogs because too few parties chose to mediate their disputes, even though the majority of parties that did mediate their dispute reached settlement. Therefore, the Italian legislature decided to mandate mediation to make more parties seek mediation to relieve astonishing court backlogs. The Decree is highly innovative because it makes Italy the only country in the E.U. that mandates mediation in civil disputes. Unlike in Italy, however, enough parties in Slovenia were choosing mediation to alleviate court backlogs that mediation could remain voluntary and therefore the law only generally promotes the awareness, use, and availability of mediation. Voluntary mediation schemes, like the one in Slovenia, are nothing new. Across the E.U., mediation is overwhelmingly voluntary.26 Slovenia’s law, enacted around the same time as the Decree, serves as an example of the spectrum of mediation laws that Member States can implement—from the mandatory system in Italy to the voluntary system seen in Slovenia. 21. Id. 22. Id. 23. Id. 24. See Zakon o alternativem res̆evanju sodnih sporov [ZARSS], 97/2009 [Alternative Litigation Settlement Act] art. 4 ¶2 (Slovn.). 25. Id. art. 2. No Slovenian court is prohibited from referring parties to mediation. In fact, the county, district, regional, labor, and high courts (including high labor and high social courts) are all responsible for setting up independent programs for court referral to mediation. The only civil case in which a court cannot refer mediation is in social disputes. See generally Zakon o delovnih in socialnih sodis̆cih [ZDSS-1] [Labour and Social Courts Act] (Slovn.). 26. Zakon o alternativem res̆evanju sodnih sporov [ZARSS], art. 15, ¶1 (The court shall provide the option of alternative dispute settlement to the parties in each case, unless the judge for the particular case deems this to be inappropriate.). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW MEDIATION E. DIFFERENCES BETWEEN ITALY AND 115 SLOVENIA: JUDGES The difference between mandatory and non-mandatory mediation influences the role of judges in both mediation systems. In Italy, the judge’s primary role is to enforce settlements made during mediation and to ensure that parties have mediated their dispute prior to accessing the courts. In Slovenia, however, the judge’s primary responsibility is to inform parties of the option to mediate and to raise the parties’ awareness of mediation—the judge acts as the gatekeeper by determining which disputes require mediation.27 F. DIFFERENCES BETWEEN ITALY AND SLOVENIA: QUALITY CONTROL Italy and Slovenia also represent the ways E.U. countries can institute quality control measures while still ensuring that parties across the E.U. receive mediation services of similar quality. In Italy, the registration of mediators is controlled solely by statute—there is no judicial intermediary and the Ministry of Justice, not the courts, maintains the register of mediators.28 The mediation bodies that are qualified to register with the Ministry of Justice maintain their own quality control measures that are adequate to enable them to register with the Ministry. In Slovenia, however, the mediation registers are controlled directly by the courts in accordance with the law.29 According to the law, all mediators listed by every court’s program must meet the limited requirements set out in Article 8.30 Under Article 8, section 1, the mediator must have the capacity to enter a contract, must not have been convicted by final judgment for a deliberate criminal offense for which they were prosecuted ex officio, must have completed at least the first level of post-secondary education, and must have undergone mediation training according to the program determined by the Minister of Justice.31 Furthermore, the criteria for removal are explicitly set out in Slovenia’s law.32 This difference in quality control regulation highlights how countries across the E.U. can regulate mediators and mediation service providers in different ways and still ensure that quality control measures are implemented and enforced. G. CONCLUSION Italy and Slovenia33 show how two E.U. Member States can respond differently to the pressures of supranational legislation while, at the same time, seeking to improve access to 27. Id. art. 18, ¶¶ 1, 5. The law does not address the consequences to the parties if both parties refuse to attend the mediation information session. 28. See, e.g., Alexander J. Oddy, Anita Phillips & Mike McClure, Mediation Country Report: England and Wales, JAMS INT’L ADR CENTER (2010), http://www.adrcenter.com/. . ./Mediation_Country_Report_ England_and_Wales.pdf. 29. In Italy, the lawyer is the person responsible for informing the parties that they have to mediate their dispute. If the lawyer fails to do so, then the lawyer’s contract with the party is voidable according to Article 4 of the Decree. 30. Decreto Legislativo 4 marzo 2010 n. 28 (It.). 31. Zakon o alternativem res̆evanju sodnih sporov [ZARSS], Alternative Litigation Settlement Act, c. 16/ 2009 (Slov.). 32. Id. c. 8/2009. 33. Id. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 116 THE INTERNATIONAL LAWYER justice and providing beneficial mediation services. Furthermore, these two different laws addressing mediation show the diversity of challenges that individual Member States face despite their common E.U. bond. III. Greece Mediation in Greece is still a new domain. The first law on mediation has been published at the end of 2010.34 Unlike arbitration, mediation and negotiation courses are not part of the law school syllabus in Greece. Still, mediation schemes are dispersed throughout Greek legislation, namely articles 99–106 of Law 3588/2007 [Bankruptcy Code]; Law 1876/1990 on collective bargaining; Law 2251/1994 on Consumer Protection, which institutionalized out-of-court resolution panels; and quite recently, Article 2 of Law 3869/ 2010, on the settlement of debts of over-indebted persons. Until recently, the prevalent term was “conciliation,” which, pursuant to the domestic interpretation of the term, is a process where parties–acting either alone or assisted by lawyers or third persons–try to find an out-of-court dispute settlement. The third person is not a mediator; hence, he or she is not trained or assessed as mediator but has a more active role in the process: he or she not only facilitates the parties, but also intervenes by openly giving advice to the parties and suggesting concessions or solutions. Legislation also provides for court-annexed conciliation procedures, conducted according to the relevant provisions of the Greek Code of Civil Procedure. In particular, it is possible for any party to solve a civil or commercial dispute by means of a conciliation agreement with the assistance of a third party.35 The definition given in the law on Mediation (Art. 4) considers mediation as a structured process, regardless of its name, whereby two or more parties to a dispute voluntarily attempt to agree on the settlement of their dispute with the assistance of a mediator. It excludes attempts made by the court or the judge entrusted with the dispute in question in the course of judicial proceedings. The above-mentioned law concerns civil and commercial disputes, following almost literally the E.U. Mediation Directive (2008/52/EC) wording. It applies to any civil and commercial mediation taking place in Greece, irrespective of the claim’s nature (crossborder or purely domestic). The law defines a mediator as any third person asked to conduct mediation in an appropriate, effective, and impartial way, regardless of the way in which the third person has been appointed or requested to conduct the mediation. Following a vivid controversy, Article 4(c) of the draft stipulates that a mediator must be a lawyer accredited as a mediator by the competent Accreditation Body. Pursuant to Article 6, Para. 1, the Accreditation Body will be the Mediation Accreditation Commission, under the auspices of the Ministry of Justice. By means of a decision from the Ministry, a number of important issues will be regulated, such as: 1. A quality control mechanism, which will apply for the assessment of mediators; 34. Law Nr. 3898/2010, on mediation in civil and commercial matters, Official Gazette Nr. 211/ 16.12.2010. 35. Astikos Kodikas [A.K.] [Civil Code]:871 (Greece); Kodikas Politikes Dikonomias [KPOL.D.] [Code of Civil Procedure]:208, 209-12, 214(A), 233(2), 293, 667, 681(A),(B),(D) (Greece); see PELAYIA YESSIOUFALTSI, CIV. PROC. IN HELLAS (Kluwer Law International 1996); KONSTANTINOS D. KERAMEUS, INTRODUCTION TO GREEK LAW, 249-50 (K.D. Kerameus & P.J. Kozyris eds., Kluwer Law & Taxation 1988). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW MEDIATION 117 2. The requirements for the accreditation of foreign mediators; 3. A Code of Deontology, which accredited mediators must respect; and 4. Any other issue related to accreditation. Additionally, the law provides for the establishment of a commission, entrusted with the preparation of the necessary rules and regulations related to the certification criteria. A decision of the Ministry of Justice will set up the commission members.36 With respect to mediation training institutions, the law opted for a rather unfamiliar condition: the above institution has to be founded by at least one Greek Bar Association and one Greek Professional Chamber. Any other issues related to training in mediation will be regulated by presidential decree, following a proposal by the Ministry of Justice, the Ministry of Education and some other line ministries.37 The draft law provides that mediation shall be conducted in a way that does not infringe on confidentiality, unless parties agree otherwise, and that before initiating the mediation procedure, all persons participating in it shall oblige themselves in writing to respect the confidentiality of the procedure. Further, it provides that mediators, parties, their attorneys or representatives, and any other persons involved in the mediation process are not to be summoned as witnesses. In the event the latter occurs, parties are not obliged to make any depositions on what occurred during the mediation process.38 If mediation leads to a settlement agreement, the agreement is to be recorded in the minutes drafted by the mediator. The minutes can be submitted to the Court of first instance (one member section) in the place where mediation took place at the initiative of the mediator, following a request from any of the parties concerned. The minutes become enforceable once submitted as stated above.39 Thus, the agreement’s enforceability is secured even in case of a party’s reluctance, unlike the wording of the E.U. Directive, pursuant to which the common action of the parties is required in principle. In the latter case, one party may act solely only upon the explicit consent of the others. The law does not explicitly provide whether a mediation clause stipulated in a contract may be considered as the basis of a relevant plea, as is the case regarding an arbitration clause. At present, there are only two mediation providers in Greece: one is the Hellenic Center of Mediation, located in Athens, which has a significant number of mediators, trained and assessed (in their majority) by the CIArb of London. A mediation center exists also in the city of Thessaloniki, in Northern Greece’s Macedonia district, under the auspices of the Thessaloniki Bar. The Law on Mediation provides the minimum hourly rate of the mediator’s fee, which is to be defined and amended by decision of the Ministry of Justice. The maximum duration allowed is twenty-four hours, including preliminary preparation of the process. The parties and the mediator are free to agree on a higher amount for the mediator’s fees.40 Meanwhile, a special commission to the Ministry of Justice has submitted a draft law on the acceleration and rationalization of the civil procedure. The draft deals also with ADR 36. 37. 38. 39. 40. A.K. A.K. A.K. A.K. A.K. Art. Art. Art. Art. Art. 5. 5.6 Law 3898/2010. 5 ¶ 2 Law 3898/2010. 10 Law 3898/2010. 9 ¶ 2 Law 3898/2010. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 118 THE INTERNATIONAL LAWYER issues, including the introduction of court-annexed mediation. The draft has been presented by the Minister of Justice to the public on March 2nd, and will be submitted to the Cabinet for approval, before reaching the Parliament. The overall conclusion is that Greece is experiencing an era of significant motion in the field of ADR, particularly in the area of mediation. IV. Russia A. A NEW LEGISLATION, A NEW ERA? With the adoption of a new federal law from July 7, 2010, No. 193-FZ “On Alternative Procedure of Dispute Settlement with Participation of Mediator (“Mediation Procedure”)” (the “Law”) and a further law amending existing acts, Russia has entered a new stage in the domain of ADR methods.41 The two laws entered into force on January 1, 2011.42 Mediation is not new to Russia’s legal practice. The Law is based on the UNCITRAL 2002 Model Law, and was initiated by the Chamber of Commerce and Industry of the Russian Federation several years ago, but only in July 2010 did President Medvedev amend and sign it. In its final version, the Law is much more scrupulous than its UNCITRAL predecessor in terms of qualification standards for mediators and in the establishment and functioning of the self-governing organizations of mediators. According to Article 1(2) of the Law, mediation can be used to resolve disputes arising out of civil, family, and employment law disputes. Article 1(5) outlines the exceptions: collective employment, public interest, or third-party interest disputes. Article 5 is crucial in that it establishes the procedure as completely confidential. Articles 15 and 16 enumerate requirements for mediators. A non-professional mediator can be any person over eighteen, with full legal capacity and no criminal record. A professional mediator must be at least twenty-five years of age, with a higher education and mediator training. Public officials cannot be mediators. The most important provisions of the Law include the possibility of using mediation at any time, be it before or along with litigation or arbitration or even after the judgment has been rendered. The principal limit is 180 days for the process. Although cases taken to a mediator are still rare, the ratification of the Law will definitely have a positive impact on the workload of the courts, which numbered an astonishing twenty-five million cases in 2009. In addition, there are plans to implement mediation in dispute resolutions in small, medium, and large businesses. 41. Signed Into Law on Mediation that Creates a New Corporation Lawyers, PRAVO NEWS, July 26, 2010, http:/ /www.pravo.ru/news/view/34701. 42. Elena Makarova, Russia: New Regulation of Mediation, CDR NEWS, Sept. 3, 2010, http://www.cdr-news. com/expert-views/831-russia-new-regulation-of-mediation. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW MEDIATION 119 V. South Africa A. INTRODUCTION In South Africa, it can safely be said that the importance of mediation as a means of resolving disputes is slowly but surely gaining recognition, increasingly in the sphere of commercial disputes. But it is equally clear that in practical terms, South Africa has a long way to go before mediation is likely to enjoy the status it deserves. Overall, the practice and mindset of South African lawyers is still firmly married to the resolution of disputes in a litigious or adversarial fashion. Internationally, mediation emerged prominently upon the legal stage in the course of the 1970s. Since then it has become a preferred means of resolving a wide variety of disputes: political, environmental, commercial, marital, and employment. Yet in South Africa, this shift from the adversarial model of resolving disputes to one embracing alternative modes of dispute resolution (“ADR”), including mediation, has been markedly slower. In this article, we consider aspects of the South African mediation landscape, and in the process, we consider the reasons for the above-noted reluctance to embrace ADR, including mediation. Primarily, we look at the role mediation has played in South Africa in the past year before venturing some thoughts about the road ahead. A useful point of departure in attempting to understand recent South African attitudes to mediation is the King Report on Corporate Governance of 2009 (“King III”), in which emphasis is pertinently placed upon the merits of non-litigious solutions to disputes.43 King III states that, in fulfilling their duty of care to a company, directors and executive officers are duty-bound to ensure that disputes are resolved effectively, expeditiously, and efficiently. It has commonly been accepted that this serves as an imprimatur for directors and executives to ensure that disputes are resolved in a cost-effective way which has as limited an impact as possible upon a company’s financial and other resources, and which avoids disrupting its business relations. According to King III, mediation affords the parties a dispute option generally unavailable to those who resort to a court or an arbitral forum.44 Thus, because of King III, it has been argued that South African company directors have a fiduciary duty seriously to consider mediation as a preferred option in seeking to resolve a dispute before turning to a court or seeking out an arbitrator. The contention has even been advanced that, in appropriate circumstances, a failure to pursue mediation might provide the grounds for an action in damages against the directors of a company. By parity of reasoning, it has been argued that legal counsel acting for a corporation who fail either to include ADR clauses in their contracts or fail to draw their clients’ attention to the suitability of mediation as a solution might open themselves up to lawsuits for professional negligence. Thus, while King III and the Companies Act 71 of 2008 (which will come into effect only in April 2011 and to which we refer below) place emphasis upon the efficacy and 43. PRICE WATERHOUSE COOPERS, STEERING POINT (Sept. 2009), available at http://www.saica.co.za/Portals/0/documents/PWC%20SteeringPoint%20KingIII.pdf. 44. INSTITUTE OF DIRECTORS IN SOUTHERN AFRICA, KING REPORT ON CORPORATE GOVERNANCE FOR SOUTH AFRICA, (“KING III”) 118 (2009) available at http://african.ipapercms.dk/IOD/KINGIII/kingiiireport/ . SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 120 THE INTERNATIONAL LAWYER importance of mediation in appropriate circumstances in the corporate sphere, it is yet to be seen how they will play out in practice. In one sense, this statement encapsulates what might be termed the South African malaise: although statutes and other texts show that mediation is a necessary aid to resolving disputes, how this ideal will be put into practice is unclear. Ideals are only as good as the machinery by which they are put into effect. B. LABOR LAW AND THE CCMA 1. Mediation of Employment Disputes While it is unclear whether the direction envisaged by King III is likely in practice to be followed effectively, there is an area of South African law in which mediation has not only been successful, but in which it has been institutionalized to such an extent that it has become the preferred means of dispute resolution. The Commission for Conciliation, Mediation and Arbitration (“CCMA”),45 which was set up in terms of the Labor Relations Act 66 of 1995 and which replaced the erstwhile Industrial Court, holds sway over the majority of employment disputes: under the aegis of the CCMA, the State provides free mediation, conciliation, and arbitration in the majority of disputes which relate to the employment relationship. The CCMA comprises a panel of full-time and part-time trained mediators, conciliators, and arbitrators. Unlike private mediation and arbitration, in which the process itself is voluntary, at the CCMA the employer has to attend, if not the conciliation, then at least the arbitration. Whatever criticisms have been leveled at the CCMA, the measure of success it has attained since its inception is notable. Once a dispute is lodged with the CCMA, a commissioner is appointed and is enjoined to seek to resolve the dispute within thirty days. The commissioner is responsible for devising a conciliation strategy setting out ways to end the dispute. In the ordinary course, this strategy should include mediation, the collecting of evidence, and the putting forward of a recommended solution. Within thirty days (or within the longer period agreed upon by the parties), the commissioner has to provide a certificate stating the outcome of the dispute. Over the past year, the CCMA further solidified its predominantly positive reputation in South Africa by its successful mediation of a significant number of potentially protracted and destructive labor disputes. In its annual report, presented to the South African Parliament on September 14, 2010, executive director Nerine Kahn states: “We are proud of being the largest dispute resolution body in the world.”46 With the FIFA Football World Cup held in South Africa in mid-2010, the CCMA had its work cut out during 2009 and the first part of 2010 to ensure that industrial action was kept to a manageable minimum. For this reason, the CCMA set up so-called “2010 units” at each of its regional offices. The function of those units was to identify, to monitor, and to deal with instances of labor conflict. The approach adopted was two-fold, comprising both a proactive component of actively engaging stakeholders, and a reactive component of rapidly deploying commissioners to address cases in which conflict escalated. 45. Commission for Conciliation, Mediation, & Arbitration, http://www.ccma.org.za/ (last visited Jan. 14, 2011). 46. Id. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW MEDIATION 121 Amidst widespread criticism from economists and political commentators that certain unions intended to exploit the situation and to hold the government and various state enterprises to ransom by planning and staging strikes in the run-up to the World Cup, in an attempt to extract pay set above inflation, the task of the CCMA in defusing situations of conflict which arose was performed in a politically and emotionally charged context.47 2. Important Disputes Resolved by the CCMA in 2010 In May 2010, a dispute over pay arose between Transnet and the South African Transport Workers’ Union (“SATAWU”), which on the eve of the World Cup resulted in a strike that threatened to hobble national rail and port operations across the country. The crisis sharpened when the United Transport and Allied Trade Union (“UTATU”) joined forces with SATAWU. Together they represented eighty-five percent of Transnet’s workforce of 54,000 people. Eventually, both unions agreed to meet Transnet and a mediator from the CCMA, and the dispute was resolved on the eve of the World Cup, preventing potentially dire consequences for South Africa’s hosting of this global event.48 Yet even more perilously threatening was the dispute between the state power company Eskom and the trade unions Solidarity, the National Union of Mineworkers, and the National Union of Metalworkers of SA, which unfolded in July during the World Cup itself, and which placed the staging of the semi-final and final match in jeopardy. This dispute was resolved when Eskom and the trade unions signed a one-year wage deal after protracted negotiations and, eventually, the intercession of the CCMA.49 Moreover, the effective intervention by the CCMA in a dispute between SACCAWU and Pick n Pay (concerning wages, terms, and conditions of employment for full-time and variable-time employees of Pick n Pay stores across the country) ended a national strike. During the strike, the management of shopping centers against SACCAWU obtained several injunctions concerning picketing by strikers. The CCMA was approached to assist in the establishing of picketing rules for the strike that commenced on October 28, 2010. On November 5, 2010, CCMA commissioners assisted the parties in concluding interim picketing rules, which came into effect on November 7, 2010. At the meeting of November 5, 2010, the CCMA commissioners involved also explored the prospect of achieving a settlement of the main dispute. The parties agreed to reconvene on November 8, 2010, and to participate in CCMA mediation in terms of Section 150 of the Labor Relations Act. On November 9, 2010, a CCMA commissioner succeeded in helping the parties to end the dispute. In sum, besides such graphic if anecdotal evidence, an overview of the success of the CCMA in the past year can best be gleaned from its annual report for the financial year 2009-2010.50 47. See Manie Van Dyke, Transnet Unions Trying to Hold World Cup To Ransom, POLITICS WEB, May 12, 2010, http://www.politicsweb.co.za/politicsweb/view/politicsweb/en/page71619?oid=175604&sn=Detail&pid =71619. 48. See CCMA Urged to Intervene in Transnet Strike, MAIL & GUARDIAN ONLINE, May 13, 2010, http:/ /www.mg.co.za/article/2010-05-13-ccma-urged-to-intervene-in-transnet-strike. 49. Dewald van Rensburg, CCMA Steps in to Stop Eskom Strike, FIN24, June 20, 2010, http://www.fin24. com/Business/CCMA-steps-in-to-stop-Eskom-strike-20100620. 50. Annual Report, http://www.ccma.org.za/UploadedMedia/CCMA_2009-2010_Annual_Report.pdf (last visited Feb. 2, 2011). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 122 THE INTERNATIONAL LAWYER According to this source, the total number of disputes referred to the CCMA in the past year was 153,657. This amounted to 617 new referrals for every working day. Over 116,000 of these cases were dealt with by way of conciliation (or mediation), an average of 466 on each working day. This statistic indicates an increase of fourteen percent over the previous year. Some 99.8 percent of the total conciliations were heard within the statutory thirty-day period, and the average number of days from referral to finalization was twenty-seven. Whatever criticisms might be leveled at it, the CCMA has become an effective body that manages to resolve disputes within its jurisdiction. To the extent that mediation has not set root deeply in the South African legal landscape, the CCMA serves as a model that might fruitfully be adopted and adapted in cognate areas. As will appear from the discussion below, one of the crucial features that distinguish the CCMA from mediation in other pockets of South African law is its significantly obligatory nature: it represents a form of mandatory mediation. C. LACK OF MEDIATION SUCCESS IN OTHER SPHERES But, by way of contrast, it is generally accepted that the success of mediation in the employment and other arenas has not been replicated elsewhere in South African law. This lack of success would appear to be the case notwithstanding the fact that the legislature (and the judiciary) has been emitting an increasingly strong message that mediation is a necessary tool to be applied in a wide variety of contexts. Notably, the legislature has identified inter alia the following divergent fields as being susceptible to dispute resolution through mediation: family law (the Children’s Act 38 of 2005 contains many mediation provisions), company law (the Companies Act has been mentioned above), consumer protection (the National Credit Act 34 of 2005 (“NCA”) and the Consumer Protection Act 68 of 2008 (“CPA”) have mediation provisions), and land reform. While the relevant provisions of the CPA and the Companies Act are yet to come into effect, in the recent past scholars have, on the basis of mediation provisions already in force in a number of areas, considered the reasons why they have failed to transform the South African legal landscape. For instance, it has been argued cogently that the primary root of this lack of success is the machinery of the civil courts itself.51 D. EMERGENT MEDIATION PRINCIPLES In light of recent developments in South African law, perhaps most notably the Brownlee decision, a 2009 case holding that the legal representatives of divorcing parties bore a positive duty to advise the parties of the benefits of mediation,52 it has been argued that a number of principles pertaining to mediation should now be accepted as forming part of South African law.53 51. Alan Rycroft, Why Mediation is not Taking Root in South Africa, in Africa Centre for Dispute Settlement, QUARTERLY NEWSLETTER, (University of Stellenbasch Business School) Oct. 2009, at 2, 3 available at http:// www.usb.ac.za/disputesettlement/pdfs/October_Newsletter_2009.pdf. 52. B, M v. B, Ng, 2008, (Unreported 25274) at 21 para. 49 (S. Afr.). 53. Hendrik Kotze, Rule 37 and Mediation in Africa Centre for Dispute Settlement, QUARTERLY NEWSLETTER, (University of Stellenbasch Business School) Oct. 2009, at 6–8, available at http://www.usb.ac.za/dispute settlement/pdfs/October_Newsletter_2009.pdf. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW MEDIATION 123 The first of these principles is that the parties to a dispute are obliged seriously to consider the appropriateness of mediation. This obligation is contained in Uniform Rule 37(6)(d), which, in terms of the Brownlee judgment, is plainly of general application, spanning the gamut of different types of disputes. The second is that parties should refer a matter to mediation where a reasonable chance exists that it might contribute to the dispute being settled in toto or to a settlement of certain of the issues in dispute. Moreover, the principle emerges that attorneys are duty-bound to advise their clients of the benefits of mediation, and to provide them with advice concerning the submission of a dispute to mediation. The fourth principle is that a party or legal representative neglecting such duty makes him vulnerable to be punished by means of an adverse costs order. E. THE ROAD AHEAD In South Africa, the emphasis placed upon the importance of mediation by King III is sharply articulated in the new Companies Act, the NCA, and the CPA. The NCA is already in force, but the other two statutes will come into effect in the course of 2011.54 It therefore remains to be seen how effective the broader scheme of provisions regarding commercial mediation will prove to be.55 54. See A. Mattiuzzo, Drowning in Debt? Mediation May Just Save Your Property, TAXTALK 16:16-17, May/ June (2009) (S. Afr.). 55. P. Arthur, The Many Merits of Mediation, WITHOUT PREJUDICE (S. Afr.) Feb. 2010. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Courts YULIA ANDREEVA, MAURIZIO BRUNETTI, RONALD E.M. GOODMAN, GUILLAUME LEMENEZ, YURI PARKHOMENKO, CANDICE PILLION, AND CESARE P.R. ROMANO* This report summarizes significant developments in 2010 concerning international courts and tribunals, particularly the International Court of Justice, the International Tribunal for the Law of the Sea, international tribunals operating under the auspices of the Permanent Court of Arbitration, and arbitral tribunals constituted under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. This report covers the period of activity from December 1, 2009, to November 30, 2010. I. International Court of Justice1 The International Court of Justice (“ICJ” or the “Court”) is the principal judicial organ of the United Nations (“U.N.”). The ICJ’s jurisdiction is two-fold: to deliver judgments in contentious cases submitted to it by sovereign states, and to issue advisory opinions at the request of certain U.N. organs and agencies.2 A. CONTENTIOUS CASES During the period under review, the Court delivered two substantive judgments and one order regarding the admissibility of a counter-claim. These are summarized below. * Ronald E.M. Goodman is Co-Chair of the International Courts Committee of the ABA Section of International Law. Dr. Goodman is a partner at Foley Hoag LLP. Yulia Andreeva, Maurizio Brunetti, Guillaume Lemenez, and Cesare P.R. Romano are the Committee’s Co-Vice Chairs. Ms. Andreeva serves as Legal Officer at the United Nations Development Programme in New York. Mr. Brunetti serves as Principal Adviser to the President of the Iran-United States Claims Tribunal, The Hague, The Netherlands. Mr. Lemenez serves as Legal Officer in the Legal Practice Group of the United Nations Office for Project Services. Dr. Romano is Professor of Law, W. Joseph Ford Fellow, at Loyola Law School, Los Angeles, and Co-Director of the Project on International Courts and Tribunals (PICT). Mr. Yuri Parkhomenko is an associate at Foley Hoag LLP. Ms. Pillion is a J.D. Candidate 2011 at Loyola Law School, Los Angeles. The views expressed in this article are those of the authors and do not necessarily represent the views of any government or international organization associated with them. 1. INTERNATIONAL COURT OF JUSTICE, http://www.icj-cij.org (last visited Jan. 20, 2011). ICJ decisions, pleadings, and other related materials are available within the website. 2. U.N. Charter arts. 92, 96, available at http://www.un.org/en/documents/charter/chapter14.shtml; Statute of the International Court of Justice, art. 36, available at http://www.icj-cij.org/documents/index.php?p1= 4&p2=2&p3=0. 125 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 126 THE INTERNATIONAL LAWYER In addition, two matters were removed from the list pursuant to the applicants’ requests. First, on May 12, 2010, the Court issued an order in the matter of Certain Questions Concerning Diplomatic Relations (Honduras v. Brazil), recording the request by Honduras to discontinue the proceedings. Noting that the Brazilian Government had not taken any steps in the said proceedings, the Court removed the case from the list. Second, on November 17, 2010, pursuant to the request of the applicant, to which the respondent did not object, the Court issued a similar order in the matter of Certain Criminal Proceedings in France (Democratic Republic of the Congo v. France). 1. Pulp Mills on the River Uruguay (Argentina v. Uruguay) On April 20, 2010, the ICJ delivered a judgment in the Pulp Mills case.3 The case arose from a dispute between Argentina and Uruguay concerning the construction by Uruguay of the CMB (ENCE) and Orion (Botnia) pulp mills on the River Uruguay, which forms a shared border between the two countries. Argentina commenced the ICJ proceedings against Uruguay in 2006 pursuant to the 1975 bilateral treaty known as the Statute of the River Uruguay, claiming, inter alia, that the construction threatened the river and its environs with likely damage to water quality. In its judgment, the Court first found that Uruguay had breached the Statute’s “procedural obligations of informing, notifying and negotiating” with Argentina and the Administrative Commission of the River Uruguay during the development of plans for the pulp mills.4 But, it rejected Argentina’s contention that Uruguay had a “no construction” obligation after the negotiation period provided for by the Statute had expired.5 The Court further held that Uruguay had not breached its substantive obligations for the protection of the environment under the Statute by authorizing the construction of the paper mills.6 Turning to remedies, the Court ruled “that its finding of wrongful conduct by Uruguay in respect of its procedural obligations per se constitutes a measure of satisfaction for Argentina.”7 In light of this finding, it rejected Argentina’s plea to order Uruguay to dismantle the Orion (Botnia) mill, pay compensation, and provide guarantees that in the future Uruguay would not prevent the Statute from being applied.8 It also rejected Uruguay’s request to confirm its right to continue the construction.9 Finally, the Court emphasized that the Statute places the parties under a continuous duty to cooperate, which encompasses ongoing monitoring of an industrial facility such as the paper mill.10 2. Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo) On November 30, 2010, the Court delivered a judgment in the Case Concerning Ahmadou Sadio Diallo. Guinea instituted the ICJ proceedings against the Democratic Re3. See Pulp Mills on the River Uruguay (Arg. v. Uru.), Judgment, ¶ 282 (Apr. 20, 2010), available at http:// www.icj-cij.org/docket/files/135/15877.pdf. 4. See id. ¶¶ 81, 104-07, 111, 119-21, 143-49. 5. See id. ¶ 157. 6. See id. ¶¶ 173-75, 180, 187-89, 195-200, 204-19, 225, 265. 7. See id. ¶ 269. 8. See id. ¶¶ 275, 277-78. 9. See id. ¶ 280. 10. See id. ¶ 281. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL COURTS 127 public of the Congo (“DRC”) in 1998, in the exercise of diplomatic protection of its national, Ahmadou Sadio Diallo. It initially contended that Mr. Diallo, a founder of two private companies in the DRC, had been the victim of arrest, detention, and expulsion measures taken by the DRC authorities in 1995-1996 in violation of international law.11 In 2003, in reply to the DRC’s preliminary objections concerning admissibility, Guinea submitted for the first time that Mr. Diallo had also been subjected to unlawful arrest and detention in 1988-1989.12 It was not until 2008, however, that Guinea introduced a detailed claim, alleging that the DRC’s conduct arising from those earlier events amounted to a violation of international law.13 In its previous judgment of May 24, 2007, the Court declared that Guinea’s application was admissible insofar as it concerned protection of Mr. Diallo’s rights as an individual and protection of his direct rights as associé in his two companies.14 In its 2010 judgment, the Court first found that Guinea’s belatedly filed additional claim concerning the arrest and detention of Mr. Diallo from 1988-1989 was inadmissible on the ground that it was neither “implicit” in Guinea’s 1998 application, nor did it “arise directly out of the question which was the subject-matter of” that application.15 Turning to the DRC’s conduct in 1995-1996, the Court first held the DRC responsible for breaching several obligations under the International Covenant on Civil and Political Rights (Covenant) and the African Charter on Human and Peoples’ Rights (African Charter). In particular, the Court ruled that Mr. Diallo’s expulsion was not in accordance with Congolese law, as required by the Covenant and the African Charter, and was effected in the absence of any “compelling reasons of national security,” as required by the Covenant.16 Further, according to the Court, Mr. Diallo’s arrests and detentions were arbitrary.17 The Court observed in that respect that Mr. Diallo was imprisoned for a particularly long time, and it would appear that the authorities made no attempt to ascertain whether his detention was necessary.18 Mr. Diallo was also never informed of the reasons for his detentions, as the Covenant and the African Charter require.19 On the other hand, the Court found that Mr. Diallo was not subject to mistreatment during his detentions, and hence the DRC did not violate the Covenant and the African Charter in that respect.20 The Court further held that, by not informing Mr. Diallo without delay of his right to consular assistance under the Vienna Convention on Consular Relations, the DRC violated its obligations under Article 36(1)(b) of that Convention.21 11. See Ahmadou Sadio Diallo (Rep. of Guinea v. Dem. Rep. Congo), Judgment, ¶¶ 16-19 (Nov. 30, 2010), available at http://www.icj-cij.org/docket/files/103/16244.pdf. 12. See id. ¶ 30. 13. See id. ¶ 32. 14. See Ahmadou Sadio Diallo (Rep. of Guinea v. Dem. Rep. Congo), Judgment on Preliminary Objections, ¶ 98 (May 24, 2007), available at http://www.icj-cij.org/docket/files/103/13856.pdf. 15. Diallo, Judgment, ¶¶ 36-48. 16. See id. ¶¶ 64-74. 17. See id. ¶¶ 75-82. 18. See id. ¶ 82. 19. See id. ¶¶ 83-85. 20. See id. ¶¶ 88-89. 21. See id. ¶¶ 90-97. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 128 THE INTERNATIONAL LAWYER Finally, the Court found that the DRC did not violate Mr. Diallo’s direct rights as an associé in his companies, including the right to participate and vote in general meetings of the companies, to appoint a gérant, to oversee and monitor the management of the companies, as well as the right to property over the companies’ parts sociales.22 With respect to remedies, considering “in particular the fundamental character of the human rights obligations breached” by the DRC, the Court ruled that, “in addition to a judicial finding of the violations, reparation due to Guinea for the injury suffered by Mr. Diallo must take the form of compensation.”23 The Court further decided that, failing agreement between the parties on the matter of compensation within six months from the date of the judgment, the question of compensation due to Guinea will be settled by the Court in a subsequent phase of the proceedings.24 3. Jurisdictional Immunities of the State (Germany v. Italy) On July 6, 2010, the ICJ issued an order finding that Italy’s counter-claim against Germany in the matter under the European Convention for the Peaceful Settlement of Disputes (European Convention) was inadmissible since it did not fall within the jurisdiction of the Court, as required by Article 80 of the Rules of Court.25 Germany instituted proceedings against Italy in late 2008. In its application, it contended that Italian judicial authorities had repeatedly violated Germany’s jurisdictional immunity by admitting civil claims against Germany based on violations of international humanitarian law committed during the Second World War.26 In its counter-memorial, Italy requested the Court to find that Germany was in violation of its obligation under the European Convention by denying effective reparation to Italian victims of crimes against humanity committed by the Nazi regime during the Second World War.27 In its order, the Court found that the real cause of Italy’s counter-claim relates to facts or situations that occurred prior to the entry into force of the European Convention in 1961 as between the parties, namely, the legal regime established in the aftermath of the Second World War.28 Hence, according to Article 27(a) of the European Convention, Italy’s counter-claim does not fall within the temporal scope of the Court’s jurisdiction.29 In light of this finding, the Court refrained from determining whether the counter-claim directly relates to the subject matter of Germany’s claim.30 22. See id. ¶¶ 99-159. 23. See id. ¶ 161. 24. See id. ¶ 164. 25. See Jurisdictional Immunities of the State (Ger. v. It.), Order, ¶ 35 (July 6, 2010), available at http:// www.icj-cij.org/docket/files/143/16027.pdf; see also Rules of Court, art. 80, available at http://www.icj-cij.org/ documents/index.php?p1=4&p2=3&p3=0. 26. Jurisdictional Immunities at ¶ 1. 27. See id. ¶ 3. 28. See id. ¶¶ 27-30. 29. See id. ¶¶ 31, 33. 30. See id. ¶ 32. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL COURTS 129 B. ADVISORY PROCEEDINGS During the period under review, the Court delivered one advisory opinion and one order regarding a request for an advisory opinion. These are summarized below. 1. Accordance with International Law of the Unilateral Declaration of Independence in Respect of Kosovo On July 22, 2010, in response to a request by the U.N. General Assembly, the Court delivered an advisory opinion, declaring that Kosovo’s unilateral declaration of independence, adopted on February 17, 2008, did not violate international law.31 At the outset of its opinion, the Court unanimously found that it had jurisdiction in the matter32 and, by nine votes to five, decided to exercise its discretion and comply with the General Assembly’s request.33 It therefore rejected an argument made by some participants in the proceedings that the Court should refuse to provide an advisory opinion because the Security Council, not the General Assembly, was principally seized of the matter of Kosovo’s independence.34 Turning to the scope and meaning of the question put before it by the General Assembly, the Court emphasized that it had not been asked to rule on the legal consequences of the declaration and, in particular, on whether Kosovo had achieved statehood.35 Rather, the Court’s task was limited to advising on whether a unilateral declaration of independence constitutes a violation of international law.36 With regard to the substance of the request, the Court first examined the lawfulness of Kosovo’s declaration of independence under general international law.37 Having reviewed the development of the right to self-determination and the principle of territorial integrity, as well as the practice of the U.N. Security Council, the Court concluded that “general international law contains no applicable prohibition of declarations of independence.”38 The Court then turned to the lex specialis created by the Security Council Resolution 1244 (1999) (Resolution), which set forth a “temporary, exceptional legal regime” for the administration of Kosovo,39 and to the Constitutional Framework for Provisional SelfGovernment (Constitutional Framework) promulgated thereunder by the U.N. Mission in Kosovo (“UNMIK”). It determined that those instruments contained no specific pro31. Accordance with International Law of the Unilateral Declaration of Independence in Respect of Kosovo, Advisory Opinion, ¶ 122 (July 22, 2010), available at http://www.icj-cij.org/homepage/pdf/20100722_ KOS.pdf. 32. See id. ¶¶ 18-28. 33. See id. ¶¶ 29-48, 123. 34. See id. ¶¶ 36-47. 35. Id. ¶¶ 51, 56 (noting that the Court had not “been asked to take a position on whether international law conferred a positive entitlement on Kosovo unilaterally to declare its independence or, a fortiori, on whether international law generally confers an entitlement on entities situated within a State unilaterally to break away from it.”). 36. See id. ¶ 56. 37. Id. ¶ 78. 38. See id. ¶¶ 79-84. 39. Id. ¶ 100. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 130 THE INTERNATIONAL LAWYER hibition on declaring independence that was applicable to the authors of the declaration in question.40 In reaching that conclusion, the Court first held that the authors of the declaration “did not act as one of the Provisional Institutions of Self-Government within the Constitutional Framework, but rather as . . . representatives of the people of Kosovo outside the framework of the interim administration.”41 The Court further rejected a contention that the authors of the declaration had violated the Resolution, holding that the latter did not concern the “final status of Kosovo or [the] conditions for its achievement.”42 Noting that the Security Council has the power “to make demands on actors other than United Nations Member States and intergovernmental organizations,” the Court held that no such demands were made in the Resolution.43 In any event, in the Court’s opinion, nothing in the text (including the phrase “pending a political settlement”), or in the object and purpose of the Resolution, could be construed as “a prohibition, binding on the authors of the declaration . . . against declaring independence.”44 Finally, the Court held that the declaration did not violate the Constitutional Framework because its authors were not bound by it.45 For these reasons, by ten votes to four, the Court found that the declaration of independence of Kosovo did not violate international law.46 2. Judgment No. 2867 of the Administrative Tribunal of the International Labour Organization upon a Complaint Filed against the International Fund for Agricultural Development On April 26, 2010, the ICJ received a request for an advisory opinion from the International Fund for Agricultural Development (“IFAD” or “Fund”).47 The request concerned the validity of a judgment rendered by the Administrative Tribunal of the International Labour Organization (“ILOAT”) on February 3, 2010, in favor of a U.N. staff member who had a fixed-term contract with the Global Mechanism of the U.N. Convention to Combat Desertification in Those Countries Experiencing Serious Drought and/or Desertification, Particularly in Africa (Global Mechanism). In its request, IFAD asked the Court to advise on nine separate issues, including whether the ILOAT had jurisdiction to entertain a claim by a staff member of the Global Mechanism, which is a separate legal entity and for which the Fund merely acts as a “housing organization.”48 IFAD also questioned the ILOAT’s jurisdiction to review decisions of the Managing Director of the 40. Id. ¶ 118. 41. Id. ¶ 109. 42. Id. ¶ 114. 43. Id. ¶¶ 116-17 (adding that the term “all concerned” in the text of the Resolution was not specific enough to apply to the Kosovo Albanian leadership). 44. Id. ¶ 118. 45. Id. ¶ 121. 46. Id. ¶ 123. 47. Press Release, Int’l Court of Justice, The Int’l Fund for Agric. Dev. Requests an Advisory Opinion from the Court on a Judgment Rendered by the Admin. Tribunal of the Int’l Labour Org. (May 11, 2010), http://www.icj-cij.org/docket/files/146/15933.pdf. 48. Judgment No. 2867 of the Administrative Tribunal of the International Labour Organization Upon a Complaint Filed Against the International Fund for Agricultural Development (Request for Advisory Opinion) Order, 2-3 (Apr. 29, 2010), available at http://www.icj-cij.org/docket/files/146/15931.pdf. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL COURTS 131 Global Mechanism and in particular the Tribunal’s power to substitute those decisions for its own.49 By an order of April 29, 2010, the Court decided that IFAD and its Member States were entitled to appear before it.50 It further drew up a list of states and specialized agencies that may be able to furnish relevant information in the advisory proceedings. Pursuant to article 66 of its Statute and 104 of its Rules, the Court then organized the written proceedings and fixed the time limits.51 IFAD’s request for an advisory opinion falls within the framework of the rarely used procedure for the review of judgments of administrative tribunals, which has resulted in only four advisory opinions since 1946. C. GENERAL LIST As of November 30, 2010, the list of pending contentious proceedings before the Court included the following fourteen cases, listed by date of introduction: Gabcı́kovo-Nagymaros Project (Hungary/Slovakia); Armed Activities on the Territory of the Congo (Democratic Republic of the Congo v. Uganda); Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Croatia v. Serbia); Territorial and Maritime Dispute (Nicaragua v. Colombia); Maritime Dispute (Peru v. Chile); Aerial Herbicide Spraying (Ecuador v. Colombia); Application of the International Convention on the Elimination of All Forms of Racial Discrimination (Georgia v. Russian Federation); Application of the Interim Accord of 13 September 1995 (the former Yugoslav Republic of Macedonia v. Greece); Jurisdictional Immunities of the State (Germany v. Italy); Questions Relating to the Obligation to Prosecute or Extradite (Belgium v. Senegal); Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters (Belgium v. Switzerland); Whaling in the Antarctic (Australia v. Japan); Frontier Dispute (Burkina Faso/ Niger); and proceedings instituted on November 18, 2010 by Costa Rica against Nicaragua, including a request for provisional measures, “with regard to an alleged ‘incursion into, occupation of and use by Nicaragua’s Army of Costa Rican territory as well as breaches of Nicaragua’s obligations to Costa Rica.’”52 In addition, as noted above, on April 23, 2010, IFAD requested an advisory opinion from the Court on a judgment rendered by the ILO Administrative Tribunal. The request is currently pending. D. COMPOSITION OF THE COURT As of November 30, 2010, the Court was composed of the following judges: Hisashi Owada (Japan), President; Peter Tomka (Slovakia), Vice-President; Abdul G. Koroma (Sierra Leone); Awn Shawkat Al-Khasawneh (Jordan); Bruno Simma (Germany); Ronny Abraham (France); Kenneth Keith (New Zealand); Bernardo Sepúlveda-Amor (Mexico); Mohamed Bennouna (Morocco); Leonid Skotnikov (Russian Federation); Antônio A. Cançado Trindade (Brazil); Abdulqawi Ahmed Yusuf (Somalia); Christopher Greenwood 49. Id. at 3. 50. Id. at 3-4. 51. Id. at 4. 52. Press Release, Int’l Court of Justice, Costa Rice Institutes Proceedings Against Nicaragua & Requests the Court to Indicate Provisional Measures (Nov. 19, 2010), http://www.icj-cij.org/docket/files/150/16239. pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 132 THE INTERNATIONAL LAWYER (United Kingdom of Great Britain and Northern Ireland); Xue Hanqin (China); and Joan E. Donoghue (United States of America). II. The International Tribunal for the Law of the Sea The International Tribunal for the Law of the Sea (“ITLOS” or “Tribunal”) is one of the institutional mechanisms designed to settle disputes concerning the interpretation or application of the United Nations Convention on the Law of the Sea of 1982 (“Convention” or “UNCLOS”).53 The Tribunal is composed of a body of 21 independent members54 elected for nine years by the States Parties to the Convention.55 The Tribunal’s seat is in Hamburg, Germany.56 ITLOS is open to States Parties to the Convention.57 In circumstances specifically provided for in the Convention, the Tribunal can also be open to entities other than States Parties.58 The jurisdiction of ITLOS comprises all disputes submitted to it in accordance with the Convention and all matters specifically provided for in any other agreement conferring jurisdiction on the Tribunal.59 It also has authority to give an advisory opinion on a legal question if an international agreement related to the purposes of the Convention specifically provides for this.60 The Tribunal’s Seabed Disputes Chamber has jurisdiction to hear disputes relating to activities in the International Seabed Area61 and to give advi53. United Nations Convention on the Law of the Sea, Dec. 10, 1982, 1833 U.N.T.S. 3, available at http:// www.un.org/Depts/los/convention_agreements/convention_overview_convention.htm. According to Article 287(1) of UNCLOS, a State, when signing, ratifying or acceding to the Convention or at any time thereafter, can choose one or more of the following dispute settlement mechanisms: ITLOS, the ICJ, an arbitral tribunal constituted in accordance with Annex VII of UNCLOS, and a special arbitral tribunal constituted in accordance with Annex VIII of UNCLOS for the categories of disputes specified therein. 54. UNCLOS Annex VI art. 2(1). 55. UNCLOS Annex VI art. 5(1). As of November 30, 2010, the Tribunal was composed of the following judges: José Luis Jesus (Cape Verde), President; Helmut Tuerk (Austria), Vice-President; Hugo Caminos (Argentina); Vicente Marotta Rangel (Brazil); Alexander Yankov (Bulgaria); L. Dolliver M. Nelson (Grenada); P. Chandrasekhara Rao (India); Joseph Akl (Lebanon); Rüdiger Wolfrum (Germany); Tullio Treves (Italy); Tafsir Malick Ndiaye (Senegal); Jean-Pierre Cot (France); Anthony Amos Lucky (Trinidad and Tobago); Stanislaw Pawlak (Poland); Shunji Yanai (Japan); James Kateka (United Republic of Tanzania); Albert Hoffmann (South Africa); Zhiguo Gao (China); Boualem Bouguetaia (Algeria); Vladimir Vladimirovich Golitsyn (Russian Federation); and Jin-Hyun Paik (Republic of Korea). International Tribunal for the Law of the Sea, General Information - Judges, http://www.itlos.org/general_information/judges/text_en.shtml (last visited Feb. 12, 2011). 56. UNCLOS Annex VI art 1(2). 57. UNCLOS Annex VI art 20(1). There are currently 161 States and other entities that are parties to the Convention. See the status of the Convention and the Agreement relating to the implementation of Part XI of the Convention, http://www.un.org/Depts/los/convention_agreements/convention_agreements.htm (last visited Feb. 12, 2011). 58. UNCLOS art. 291(2); UNCLOS Annex VI art 20(2). 59. UNCLOS Annex VI art 21. The Tribunal also has jurisdiction over any dispute concerning the interpretation or application of an international agreement related to the purposes of the Convention which is submitted to it in accordance with the agreement (UNCLOS art. 288(2)) and jurisdiction to entertain an application for the prompt release of a detained vessel or its crew (UNCLOS art. 292). 60. Rules of the International Tribunal for the Law of the Sea art. 138(1), ITLOS/8, Mar. 17, 2009, available at http://www.itlos.org/documents_publications/documents/Itlos%208%20E%2017%2003%2009.pdf (last visited Feb. 12, 2011). 61. UNCLOS arts. 187, 188. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL COURTS 133 sory opinions on legal questions arising within the scope of the activities of the International Seabed Authority.62 To settle disputes, ITLOS pursuant to Article 15 of its Statute formed the following special chambers: the Chamber of Summary Procedure, the Chamber for Fisheries Disputes, the Chamber for Marine Environment Disputes, the Chamber for Maritime Delimitation Disputes, and the Chamber to deal with the Case Concerning the Conservation and Sustainable Exploitation of Swordfish Stocks in the South-Eastern Pacific Ocean (Chile/European Community).63 A. ITLOS IN 2010 During the period under review, no judgment was delivered by ITLOS. Some notable developments took place, however, highlighting the Tribunal’s growing importance in settling “disputes arising out of [the] interpretation [and] application of . . . the Convention.”64 One of the important developments concerns the request from the Council of the International Seabed Authority submitted to the Seabed Disputes Chamber to give an advisory opinion on: (1) the scope of legal responsibilities and obligations of States Parties to the Convention with respect to the sponsorship of activities in the Area65; (2) the extent of liability of a State Party for any failure to comply with the provisions of the Convention by an entity it has sponsored under Article 153, paragraph 2 (b), of the Convention; and (3) the necessary and appropriate measures that a sponsoring State must take in order to fulfill its responsibility under the Convention (particularly Article 139 and Annex III of UNCLOS, and the 1994 Agreement).66 This is the “first advisory opinion that the Seabed Disputes Chamber has been called upon to render.”67 The President of ITLOS also appointed three arbitrators to serve as members of an arbitral tribunal instituted under Annex VII of the Convention to settle the maritime delimitation dispute between Bangladesh and India in the Bay of Bengal.68 The three ap62. UNCLOS arts. 159(10), 191. 63. UNCLOS Annex VI art. 15. More details regarding the special chambers of ITLOS can be found at http://www.itlos.org/general_information/judges/chambers_en.shtml (last visited Feb. 12, 2011). 64. Jose Luis Jesus, Int’l Tribunal for the Law of the Sea, The Role of ITLOS in the Settlement of Law of the Sea Disputes (Dec. 2, 2010), available at http://www.itlos.org/news/statements/Jesus/jesus_washington_02 1210.pdf. 65. UNCLOS art. 1(1)(1) defines “Area” to mean the seabed and ocean floor and subsoil thereof, beyond the limits of national jurisdiction. 66. Press Release, Int’l Tribunal of the Law of the Sea, The Seabed Disputes Chamber of the International Tribunal of the Law of the Sea Receives a Request for an Advisory Opinion (May 14, 2010), http://www.itlos. org/news/press_release/2010/press_release_147_en.pdf. 67. Id. 68. Pursuant to UNCLOS Annex VII art. 3(e), if the parties to a dispute cannot agree on the appointment of one or more of the members of the arbitral tribunal, or on the appointment of the president of the arbitral tribunal, these appointments have to be made by the President of ITLOS at the request of a party to the dispute and in consultation with the parties. See also Press Release, Int’l Tribunal for the Law of the Sea, The President of the Tribunal Appoints Three Arbitrators in the Arbitral Proceedings Instituted to Settle the Maritime Boundary Dispute Between Bangladesh and India in the Bay of Bengal (Mar. 8, 2010), http://www. itlos.org/news/press_release/2010/press_release_143_en.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 134 THE INTERNATIONAL LAWYER pointed arbitrators are Rüdiger Wolfrum (as the president of the arbitral tribunal), Tullio Treves, and Ivan Shearer.69 The Tribunal continues to be seized with the dispute relating to the delimitation of the maritime boundary between Bangladesh and Myanmar in the Bay of Bengal. The proceedings were instituted by Bangladesh in 2009. This is the first case in the history of ITLOS in which it has been asked to conduct a maritime delimitation. III. Permanent Court of Arbitration The Permanent Court of Arbitration (“PCA”) was established by the 1899 Hague Convention for the Pacific Settlement of International Disputes70 as a permanent institution available to facilitate access to arbitration and other forms of dispute resolution. To date, “111 states have acceded to one or both of the PCA’s founding conventions.”71 The PCA is an institutional framework that provides registry and general administrative support to arbitral tribunals, commissions, and parties to arbitration or other forms of dispute resolution involving various combinations of states, state entities, international organizations, and private parties. The PCA administers arbitration, conciliation, and fact-finding proceedings under its own rules of procedure, which are based upon the UNCITRAL Arbitration Rules, or under any other procedural rules agreed upon by the parties. A. CASES Two arbitrations were added to the list of active cases this year:72 European American Investment Bank, AG v. Slovak Republic and Bilcon of Delaware v. Canada.73 Final awards were rendered in Chemtura Corporation (formerly Crompton Corporation) v. Canada and Romak S.A. (Switzerland) v. Uzbekistan.74 1. New Cases a. European American Investment Bank A.G. (Austria) v. Slovak Republic The dispute arises from a 2007 change in Slovak law requiring all private health insurance companies to refrain from paying dividends to their shareholders and instead to reinvest any profits back into the health care system.75 European American Investment Bank 69. Id. 70. See Hague Convention for the Pacific Settlement of International Disputes, July 29, 1899, 1 T.I.A.S. 230-46 (“Convention”). The Convention was revised in 1907. See Hague Convention for the Pacific Settlement of International Disputes, Oct. 17, 1907, 1 T.I.A.S. 577-606. 71. Member States, PERMANENT COURT OF ARBITRATION, http://www0.pca-cpa.org/showpage.asp?pag_id =1038 (last visited Jan. 20, 2011). 72. The PCA identifies the parties and publishes awards or other information in proceedings under PCA auspices only where the parties have so agreed. Cases, PERMANENT COURT OF ARBITRATION, http://www. pca-cpa.org/showpage.asp?pag_id=1029 (last visited Jan. 20, 2011). 73. Id. 74. Id. 75. Zuzana Vilikovská, Austrian Firm Seeks Arbitration Over Profit Ban for Health Insurers, THE SLOVAK SPECTATOR, Sept. 2, 2010, available at http://spectator.sme.sk/articles/view/39972/10/austrian_firm_seeks_ arbitration_over_profit_ban_for_health_insurers.html. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL COURTS 135 (“Euram”) claims damages allegedly arising from the 2007 changes in Slovak law.76 Proceedings are conducted under the UNCITRAL Arbitration Rules and in accordance with the Agreement between the Republic of Austria and the Czech and Slovak Federal Republic Concerning the Promotion and Protection of Investments. The Arbitral Tribunal is composed of Dr. Alexander Petsche, Professor Brigitte Stern, and Sir Christopher Greenwood (Presiding Arbitrator). b. Bilcon of Delaware v. Canada Bilcon of Delaware, a U.S. company, operates a basalt quarry in Canada. Bilcon’s plans to expand its quarry were rejected by a panel of environmental experts. Bilcon claims that the process of review of its plans and the accompanying delays were in violation of three provisions of the North American Free Trade Agreement (NAFTA): Articles 1102 (National Treatment), 1105 (International Law Standards of Treatment), and 1103 (MostFavored-Nation Treatment). Bilcon claims US$101 million in damages, plus costs and fees. The Arbitral Tribunal is composed of Professor Donald McRae, Professor Bryan Schwartz, and Judge Bruno Simma (Presiding Arbitrator). The arbitration is being conducted under the UNCITRAL Arbitration Rules and Chapter 11 of NAFTA. 2. Concluded Proceedings a. Romak S.A. (Switzerland) v. Uzbekistan The three-member arbitral tribunal rendered a final award on November 26, 2009, in the dispute between the Swiss company Romak S.A. and the Republic of Uzbekistan. Romak is a Swiss grain-trading société anonyme.77 Uzkhleboproduct is the fifty-one percent state-owned body responsible for grain production and distribution in Uzbekistan. Uzdon is one of Uzkhleboproduct’s corporate members responsible for foreign trade.78 Uzkhleboproduct entered into a contract with Romak for the delivery of 50,000 tons of wheat to occur on or before December 31, 1996, with itself as principal and Uzdon as commission agent.79 Romak delivered nearly 40,600 tons between July 1996 and January 1997, but it was never paid. Romak initiated arbitration against Uzdon under the aegis of the Grain and Feed Trade Association (“GAFTA”). The GAFTA arbitral tribunal found for Romak, ordering Uzdon to pay US$10,510,629.12.80 Romak attempted, but failed, to enforce the GAFTA award in both Uzbekistan and France.81 Eventually, Romak initiated arbitral proceedings against the Republic of Uzbekistan, asserting that the acts of Uzdon and Uzkhleboproduct, in addition to the failure of Uzbek courts to enforce the GAFTA award, violated the Bilateral Investment Treaty (“BIT”) between Switzerland and Uzbekistan.82 76. Id. 77. Romak S.A. (Switz.) v. Republic of Uzbekistan, Award, ¶¶ 2-3 (Perm. Ct. Arb. 2009), available at http:// www.pca-cpa.org/upload/files/ROMAK-UZBEKISTAN%20Award%2026%20November2009.pdf. 78. Id. ¶¶ 15-22. 79. Id. ¶ 28. 80. Id. ¶ 58. 81. Id. ¶ 63. 82. See id. ¶ 71. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 136 THE INTERNATIONAL LAWYER Uzbekistan contested the arbitral tribunal’s jurisdiction, arguing that neither the GAFTA arbitration award nor the sale of goods by Romak constituted an investment that would make the claims fall under the BIT.83 An Arbitral Tribunal, consisting of Mr. Noah Rubins, Professor Nicolas Molfessis, and Mr. Fernando Mantilla-Serrano (Chairman), agreed with Uzbekistan.84 The Tribunal determined that the term “investment” in the BIT necessarily involved “a contribution that extended over a certain period of time and entailed some risk.”85 Referring to the Joy Mining Machinery decision, the Tribunal held that considering the contract at issue an “investment would render meaningless the distinction between investments, on the one hand, and purely commercial transactions, on the other.”86 b. Chemtura Corporation (Formerly Crompton Corporation) v. Canada The Arbitral Tribunal for the matter of Chemtura Corp. v. Canada issued its award on August 2, 2010. The case, brought under Chapter 11 of NAFTA, pertained to the actions of the Canadian Pest Management Regulatory Agency (“PMRA”) in ending the registration of certain pest-control products manufactured by Chemtura. Chemtura is a U.S. chemical corporation. Chemtura owned a registration for a pestcontrol product that was based on lindane, a chemical that is used in agriculture as pesticide and in pharmacy to fight lice and scabies.87 In 1999, the PMRA began a special review of lindane, determined that the health risks associated with lindane warranted suspending or terminating all lindane registrations, and terminated Chemtura’s remaining lindane registrations.88 In 2005, Chemtura began arbitration under Chapter 11 of NAFTA, seeking reinstatement of its lindane registrations and damages and costs resulting from Canada’s acts or, alternatively, US$100 million in damages.89 In particular, Chemtura claimed that Canada had breached NAFTA Articles 1105 (Minimum Standard of Treatment) and 1103 (MostFavored Nation clause). Chemtura also claimed that the lindane registration cancellations were an expropriation under NAFTA Article 1110. Canada responded by asserting that it had not subjected Chemtura to a substantial deprivation, and that, in any case, the cancellation of the lindane registrations was a valid exercise of Canada’s police power.90 An Arbitral Tribunal, composed of the Honorable Charles N. Brower, Professor James Crawford, and Professor Gabrielle Kaufmann-Kohler (Presiding), concluded that Canada could not be held liable for any violations under NAFTA.91 The Tribunal considered the essence of Chemtura’s complaints on the PMRA’s review process to be that lindane products could have remained usable for slightly longer than determined by the PMRA.92 The 83. Id. ¶¶ 93-94. 84. Id. ¶ 211. 85. Id. ¶ 212. 86. Id. ¶ 185. 87. Chemtura Corporation (formerly Crompton Corporation) v. Government of Canada, Award, ¶¶ 1, 6, 14 (Perm. Ct. Arb. 2010), available at http://www.pca-cpa.org/upload/files/Chemtura%20Award%202%20 Aug%202010%20scanned.pdf. 88. See id. ¶¶ 21, 34. 89. Id. ¶¶ 50, 52. 90. Id. ¶ 97. 91. Id. at pt. V, ¶¶ b-d. 92. See id. ¶ 133. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL COURTS 137 Tribunal determined that the PMRA acted without bad faith and afforded adequate fairness to Chemtura in its review processes and was acting with regard for its treaty obligations and regulatory responsibilities when reexamining the use of lindane.93 The Tribunal concluded that Chemtura was given repeated opportunity to voluntarily suspend its lindane registrations and did not sufficiently participate in the process in order to prevent termination by the PMRA.94 The Tribunal went on to hold that the PMRA’s process of reviewing and registering Chemtura-developed lindane replacement pesticides had not been unduly delayed or neglected. The Tribunal stated that Chemtura would have had to prove that the PMRA caused the new product registration to be unfairly delayed, and not merely that the registration was not expedited, in order to find a NAFTA violation.95 Finally, the Tribunal examined Chemtura’s expropriation claim under NAFTA Article 1110 and determined that there had not been substantial deprivation.96 The Tribunal found that, while elements such as goodwill, market share, and a customer base could be considered part of Chemtura’s investment in the Canadian market, Chemtura had not experienced a great enough deprivation to its business to qualify as having experienced an expropriation.97 The Tribunal determined that lindane product sales amounted to ten percent of Chemtura’s sales in Canada, which was not significant enough to be considered substantial.98 Additionally, regulating pesticide products in this manner was determined to be squarely within the police powers available to the PMRA and as such could not constitute an expropriation.99 The Tribunal concluded that Chemtura would have to pay the costs of the arbitration. IV. ICSID The International Centre for Settlement of Investment Disputes (“ICSID”) was established by the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“Convention”).100 With the denunciation by Ecuador, effective January 7, 2010, and the signature by Qatar on September 30, 2010,101 156 States were signatories to the Convention at the time of this writing.102 This section reports 93. Id. ¶ 138. 94. See id. ¶ 192. 95. Id. ¶ 211. 96. Id. ¶ 265. 97. Id. ¶ 263. 98. Id. ¶ 262. 99. Id. ¶ 266. 100. Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, Oct. 14, 1966, 17 U.S.T. 1270. 101. Press Release, ICSID, State of Qatar Signs the ICSID Convention (Sept. 30, 2010), http://icsid.world bank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=OpenPage&PageType=Announcements Frame&FromPage=Announcements&pageName=Announcement65. 102. List of Contracting States and Other Signatories of the Convention, ICSID, http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=ShowDocument&language=English (last updated Dec. 27, 2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 138 THE INTERNATIONAL LAWYER briefly on the awards and decisions delivered by ICSID tribunals and ad hoc committees from January 1, 2010, to November 30, 2010.103 A. AWARDS During the period under review, fifteen awards were rendered by ICSID tribunals. In Ioannis Kardassopoulos and Ron Fuchs v. Georgia, the Claimants initiated proceedings against Georgia in relation to an oil and gas distribution enterprise. On March 3, 2010, a tribunal ordered Georgia to pay each of the Claimants US$45,124,736.83. On July 16, 2010, Georgia filed an application for annulment with the Centre. In Chevron Bangladesh Block Twelve, Ltd. and Chevron Bangladesh Blocks Thirteen and Fourteen, Ltd. v. People’s Republic of Bangladesh, the Claimants brought an action against Bangladesh in relation to operations of exploration, development, and production of natural gas. In an award on May 17, 2010, which has not been published, Chevron’s claims were denied. In Gemplus, S.A., SLP, S.A. and Gemplus Industrial, S.A. de C.V. v. United Mexican States, the Claimants filed claims against Mexico in connection with a concession to operate the national registry of motor vehicles. On June 18, 2010, a tribunal issued an award, which has not been published. In ATA Construction, Industrial and Trading Company v. Hashemite Kingdom of Jordan, ATA initiated a case against Jordan in relation to a waterway construction project. On July 16, 2010, a tribunal found that the Claimant was entitled to proceed to arbitration with respect to a dispute arising out of a contract between the Claimant and a Jordanian company in accordance with the arbitration clause of that contract, and ordered that ongoing Jordanian court proceedings relating to the same dispute be terminated. In Alasdair Ross Anderson and Others v. Republic of Costa Rica, the Claimants sought compensation from Costa Rica for the loss of their deposits in a currency exchange operation. On May 19, 2010, a tribunal found that it lacked jurisdiction on the ground that the deposits did not constitute an investment. In Talsud, S.A. v. United Mexican States, the Claimant initiated a case against Mexico in relation to a concession to operate the national motor vehicles registry. The award, which was rendered by the tribunal on June 18, 2010, has not been published. In Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, the Claimants brought claims against Ghana in connection with a cocoa production enterprise. On June 18, 2010, a tribunal dismissed the case on the merits. In Liman Caspian Oil BV and NCL Dutch Inv. BV v. Republic of Kazakhstan, the Claimants initiated proceedings against Kazakhstan under the Energy Charter Treaty in relation to hydrocarbon exploration and extraction activities. On June 22, 2010, a tribunal rendered an award, which has not been published. In Saba Fakes v. Republic of Turkey, the Claimant brought an action against Turkey in relation to a telecommunications company. On July 14, 2010, a tribunal found that it 103. List of ICSID Cases, ICSID, http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH& actionVal=ListCases (last visited Jan. 20, 2011); Newly Released Awards and Decisions, INVESTMENT TREATY ARBITRATION, http://ita.law.uvic.ca/ (last visited Jan. 20, 2011). Unless otherwise indicated, all awards and decisions referred to in this section can be found at the above websites. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL COURTS 139 lacked jurisdiction on the ground that the Claimant’s arrangements in the company did not constitute an investment. In Piero Foresti, Laura de Carli and others v. Republic of South Africa, the Claimants filed claims against South Africa in connection with minerals companies. On August 4, 2010, a tribunal dismissed the claims on the merits. In Togo Electricité and GDF-Suez Energie Services v. Republic of Togo, the Claimants brought a case against Togo in relation to an electricity concession. The tribunal rendered an award on August 10, 2010, which has not been published. An application for annulment was registered by the Centre on November 4, 2010. In Astaldi S.p.A. v. Republic of Honduras, Astaldi initiated an action against Honduras in connection with a highway rehabilitation contract. On September 17, 2010, a tribunal ordered Honduras to pay Astaldi a total of US$6,219,514.51. In AES Summit Generation Ltd. and AES-Tisza Erömü Kft. v. Republic of Hungary, the Claimants filed claims against Hungary under the Energy Charter Treaty in relation to electricity power stations. On September 23, 2010, a tribunal found that it lacked jurisdiction over the contractual claims and denied the treaty claims on the merits. In Alpha Projektholding GmbH v. Ukraine, the Claimant initiated a case against Ukraine in connection with a hotel development project. On November 8, 2010, a tribunal ordered Ukraine to pay the Claimant US$2,979,232. In Nations Energy, Inc. and others v. Republic of Panama, the Claimants brought claims against Panama in relation to an electricity power generation project. On November 24, 2010, a tribunal rendered an award, with a dissenting opinion, which was not publicly available at the time of this writing. B. ANNULMENT DECISIONS During the period under study, five annulment decisions were delivered by ICSID ad hoc committees. In Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Kazakhstan, Kazakhstan applied for annulment of an award ordering it to pay the Claimants US$125,000,000. On March 25, 2010, an ad hoc committee dismissed the application in its entirety. In Compagnie d’Exploitation du Chemin de Fer Transgabonais v. Gabonese Republic, Gabon requested annulment of an award ordering it to pay the Claimant US$230,000,000. On May 11, 2010, an ad hoc committee rendered a decision, which has not been published. In Helnan International Hotels A/S v. Arab Republic of Egypt, the Claimant applied for annulment of an award dismissing its claims. On June 14, 2010, an ad hoc committee annulled a holding of the tribunal but otherwise denied the application. In Sempra Energy Int’l v. Argentine Republic, Argentina requested annulment of an award ordering it to pay Sempra US$128,250,462. On June 29, 2010, an ad hoc committee annulled the award on the ground of manifest excess of powers. Sempra resubmitted the dispute to the Centre on November 12, 2010. In Enron Creditors Recovery Corp. (formerly Enron Corp.) and Ponderosa Assets, L.P. v. Argentine Republic, Argentina applied for annulment of an award ordering it to pay Enron US$106,200,000. On July 30, 2010, an ad hoc committee annulled the holdings of the SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 140 THE INTERNATIONAL LAWYER tribunal that Argentina was precluded from relying on Article XI of the U.S.-Argentina BIT and the principle of necessity under customary international law, as well as the disposition regarding compensation. Enron resubmitted the dispute to the Centre on October 18, 2010. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Criminal Law JUDGE DONALD E. SHAVER* I. International Criminal Court Four years into Prosecutor v. Thomas Lubanga Dyilo, it is apparent that the Office of the Prosecutor (“OTP”) and the Court still have vastly different ideas about the use of confidential information. For the second time,1 the Trial Chamber has ordered the case dismissed for prosecutorial misconduct2 and the Appeals Chamber has set aside the order.3 A. THE PROSECUTOR AND THE TRIAL CHAMBER ON A COLLISION COURSE The dispute arose after the Court ordered the identity of a confidential informant (an “intermediary”) disclosed to the defense. In common domestic criminal cases, it occasionally occurs that the judge, usually after an in camera hearing with the informant or his/her “handler” present, will conclude that the informant has exculpatory evidence that is necessary to the defense.4 In such cases, the prosecution must either disclose the identity of the * Judge Donald E. Shaver is a retired Superior Court Judge in Modesto, CA, and a former Co-chair of the ABA’s International Criminal Law Committee. In 2006, he was sent by the Judicial Council of California to work with the International Criminal Court for four months, where he assisted Trial Chamber I with the preparations for the Lubanga trial. 1. The first time occurred on June 13, 2008. “In a high-level and rare difference of opinion with the UN” on the eve of trial, Trial Chamber I suspended the proceedings indefinitely and ordered Lubanga released after finding that “the widespread use by the Prosecution of confidentiality agreements under Article 54(3)(e) [went well] beyond the limited use delineated in the statute made it impossible” for Lubanga to receive a fair trial under such circumstances. The Appeals Chamber affirmed the Trial Chamber decision, but reinstated the case since the issues had been resolved in the meantime. Don Shaver, International Criminal Court Begins First Trial: Case was Nearly Dismissed Earlier for Prosecutorial Abuse, 3 INT’L CRIMINAL L. COMM. NEWSL., 1, 4 n.45 (2009), available at http://meetings.abanet.org/webupload/commupload/IC935000/newsletterpubs/International.Criminal.Law.NewsletterJan.2009.pdf. 2. Prosecutor v. Thomas Lubanga Dyilo, Case No. ICC-01/04-01/06, Trial Chamber Redacted Decision on Intermediaries, ¶ 150 (May 31, 2010). 3. Prosecutor v. Thomas Lubanga Dyilo, Case No. ICC-01/04-01/06, Judgment on the Appeal of the Prosecutor Against the Decision of Trial Chamber I of 8 July 2010 entitled ‘Decision on the Prosecution’s Urgent Request for Variation of the Time-Limit to Disclose the Identity of Intermediary 143 or Alternatively to Stay Proceedings Pending Further Consultations with the VWU,’ (Oct. 8, 2010) [hereinafter Judgment]. 4. See People v. Hobbs, 873 P.2d 1246 (Cal. 1994). 141 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 142 THE INTERNATIONAL LAWYER informant or suffer a dismissal of the case.5 The question indirectly raised by this case was the extent to which this procedure applies on the international level. The matter came about after the defense recalled certain alleged child soldier witnesses and their parents who recanted their earlier testimonies, stating that they had been pressured by investigators for the OTP.6 To rebut these statements, the Prosecution called OTP investigators and a previously confidential “intermediary” (number 321) who described how “intermediaries,” who were usually local residents or involved with NGOs, would locate former child soldiers and bring them to the OTP investigators, who would then interview them and determine if they would be good witnesses. However, this testimony led to the disclosure of unspecified new information involving another intermediary (number 143), who was still confidential and still working in the field.7 In a closed session, the defense set forth to the Court why they could not adequately cross examine number 321 until they knew who number 143 was, and the Court apparently accepted this proposition.8 On May 12, the Court ordered disclosure of number 143’s identity only (no appearance required) to the defense once the necessary protective measures were implemented by the Victim Witness Unit of the Court (“VWU”).9 The Prosecution balked, fearing that number 143’s safety would still be jeopardized, and it requested a stay in the proceedings to appeal the Court’s order.10 On June 2, the Court denied this request.11 On July 5, the VWU notified the Court that appropriate protective measures had been worked out with number 143, and the trial and cross exam of number 321 was set to resume the next day.12 However, prior to resuming the next day, the Prosecution reported that number 143 was having second thoughts about the adequacy of the protective measures and was requesting an additional delay until the end of the week so that number 143 could further review the measures in writing.13 The Defense objected to any further delays, and the Trial Chamber agreed with the Defense. The Court feared that the delay could “inevitably be substantial, and that delay has to be seen in the context of the very considerable delays that have already been experienced in relation to this trial.”14 The Court denied the request and ordered the Prosecution to immediately disclose the identity of number 143.15 To alleviate the fears of the Prosecution, the Court imposed a protective order preventing dissemination beyond counsel and their agents.16 The Prosecution re5. Id. at 972. 6. Wairagala Wakabi, Lubanga Trial At ICC Resumes Nest Week, THE LUBANGA TRIAL AT THE INTERNATIONAL CRIMINAL COURT, Oct. 19, 2010, http://www.lubangatrial.org/2010/10/19/lubanga-trial-at-icc-resumes-next-week/. 7. Prosecutor v. Thomas Lubanga Dyilo, ¶ 7. 8. Id. 9. Id. ¶ 5. 10. Id. 11. Id. 12. Id. ¶ 7. 13. Prosecutor v. Thomal Lubanga Dyilo, Prosecution’s Document in Support of Appeal against Trial Chamber I’s Decision of 8 July 2010 to Stay the Proceedings for Abuse of Process, Case No. ICC-01/04-01/ 06, ¶ 31 (July 30, 2010). 14. Judgment, ¶ 7. 15. Id. 16. Id. ¶ 7. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CRIMINAL LAW 143 quested that the order be stayed while they prepared a request to appeal this order.17 The Court reluctantly put the matter over one more day. B. “PROFOUND AND ENDURING CONCERN” At this point, the trial, which would be the first for the ICC, was close to completion. Both the prosecution and the defense had completed their cases, and the prosecution was presenting its rebuttal evidence. The start of the trial had been delayed six months from July 2008 to January 2009. Originally estimated to be completed in twelve months, it was now well into its eighteenth month. There had been frequent logistical problems. The Court and parties were anxious to conclude it without further delays. This was not a good time for a major confrontation between the Court and the OTP. Clearly, everyone’s patience was wearing thin. The next morning, with the parties reassembled, the Court made a last-ditch effort to see if the defense could proceed with cross-examination of 321 and reserve those issues relating to number 143 to a later time.18 The defense replied that these requests were not feasible. The Court then ordered immediate disclosure of the identity one more time, specifically finding that the protective measures contemplated by VWU would be adequate.19 The Prosecution requested adjournment to the afternoon to respond. Upon reconvening in the afternoon, the Prosecution requested the Court to reconsider its order.20 The Court adjourned and did so, but on returning later, once again ordered immediate disclosure.21 The Prosecution once again requested a brief delay to allow it to confer with the VWU regarding the protective measures.22 The Prosecution argued that this delay was necessary because it was “bound by autonomous statutory duties of protection that [it] had to honour at all times” and that it had to be satisfied that disclosure would not violate this ethical obligation.23 In explaining its refusal to comply with the Court’s order at this time, the Prosecutor stated: The Prosecution is sensitive to its obligation to comply with the Chamber’s instructions. However, it also has an independent statutory obligation to protect persons put at risk on account of the Prosecution’s actions. It should not comply, or be asked to comply, with an Order that may require it to violate its separate statutory obligation by subjecting the person to a foreseeable risk. The Prosecutor accordingly has made a determination that the Prosecution would rather face adverse consequences in its litigation than expose a person to risk on account of prior interaction with this Office. This is not a challenge to the authority of the Chamber, it is instead a reflection of the Prosecution’s own legal duty under the Statute.24 The Court convened the next day, and, in view of this reply, ordered the case “stayed as an abuse of process of the Court” (tantamount to a dismissal) due to the deliberate refusal 17. 18. 19. 20. 21. 22. 23. 24. Id. Id. Id. Id. Id. Id. Id. Id. ¶ 8. ¶ 9. ¶ 10. ¶ 11. ¶ 12. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 144 THE INTERNATIONAL LAWYER to follow an order of the Court.25 Of more concern to the Court (a “profound and enduring concern”), however, was the perceived implication by the Prosecution that they could pick and choose which orders of the Court to follow, based on their interpretation of the Statute.26 The Court made the point in particular that once the trial starts, the protection of witnesses becomes the Court’s responsibility, not the Prosecution’s, and they have the last word on the adequacy of protection measures, not the Prosecution.27 C. THE APPEALS CHAMBER DECISION Unfortunately, this ruling did not prevent the further delays, which the Trial Chamber feared. The trial was suspended while the appeal was pending from July through October, at which time the Appeals Chamber reversed the dismissal order, reinstating the trial. The Appeals Chamber, which was, no doubt, reluctant to see the ICC’s first trial end in a dismissal for prosecutorial abuse of process, found that the Trial Chamber had not done enough to resolve the issue prior to ordering the indefinite stay of proceedings. By the time the appeal was decided, the Prosecution had completed its review of the protective measures and 143 had agreed to disclosure. By November, 321 was back on the stand testifying. The trial was expected to conclude by the end of the year. In its ruling, the Appeals Chamber confirmed that “when there is a conflict between the Prosecutor’s perception of his duties and the orders of the Trial Chamber, the Trial Chamber’s orders must prevail.”28 However, the Appeals Chamber explained that the dismissal sanction is a “drastic remedy” which has the potential to frustrate the overall objectives of the justice system.29 It is an “exceptional” remedy with a “high threshold” and should be used only once it is no longer possible to salvage a fair trial from the proceedings.30 In this case, the Appeals Chamber found that this threshold had not yet been reached because the Trial Chamber had not attempted to use monetary sanctions to compel disclosure, and had not made a finding that there was nothing further that could be done to salvage the trial.31 The Appeals Chamber explained that it was not necessarily holding that monetary sanctions were always a necessary prerequisite to dismissal but simply that there was nothing in the record to show that they had been considered.32 D. THE UNANSWERED QUESTION: DOES THE PROSECUTOR HAVE AN INDEPENDENT ETHICAL OBLIGATION TO PROTECT WITNESSES TO WHOM IT HAS PROMISED CONFIDENTIALITY? In its ruling, however, the Appeals Chamber did not resolve the dispute between the Prosecution and the Court and left some very important questions unanswered. Most notably, it did not resolve whether or not the Prosecution does have an independent ethi25. 26. 27. 28. 29. 30. 31. 32. Id. Id. Id. Id. Id. Id. Id. Id. ¶ 13. ¶ 15. ¶ 48. ¶ 55. ¶ 59. ¶ 60, n.135. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CRIMINAL LAW 145 cal obligation toward those witnesses which the Prosecution has recruited to cooperate at personal risk to their life and safety, nor did it provide guidance to the Court and parties regarding how to resolve the contest of wills that develops when an attorney believes that an order of the Court places him or her in an ethical dilemma. Simply stating that “the Court’s decision is final” gives short shrift to this important question. Attorneys are generally perceived to have a number of universal ethical obligations, similar to those contained in the ICC Rules of Professional Conduct.33 These rules include such ethical obligations as not disclosing client confidences,34 not undertaking representation if there is a conflict of interest with a former or current client,35 and representing the client zealously and with a minimum required level of competence.36 Prosecuting attorneys generally also have a number of ethical obligations as relating to their positions of trust.37 One such obligation deals specifically with protecting the identity of confidential informants. Customary criminal law provides the prosecution with a “Privilege of Non-disclosure” due to this ethical obligation.38 Under this privilege, if disclosure is ordered over the objection of the prosecution, the prosecution has the election to forfeit the evidence related to the informant or dismiss the case, if the former is not feasible.39 This election is not considered an abuse of process or bad faith. Thus, the Prosecution’s suggestion that a similar process should apply here is not without precedent. The Rome Statute does not expressly contain such a privilege but does impose a similar duty to protect on the Prosecution, which can equally be viewed as an ethical obligation. Article 68(1) imposes a duty on both the Court and OTP to “protect the safety, physical and psychological well-being and privacy of victims and witnesses.”40 The Appeals Chamber confirmed that the Trial Chamber does have the last word when protection issues arise at trial, but did not comment on the dual nature of this obligation.41 However, the Trial Chamber took the position that the entire responsibility for protecting witnesses transferred to them once the trial started.42 A fair reading of the Statute suggests that this is not the case. Article 68(1) initially assigns the duty of protecting witnesses to the Court, but then adds that “[t]he Prosecutor shall take such measures particularly during the investigation and prosecution of such crimes [emphasis added].”43 It would not seem logical to read “particularly” to mean “only.” Moreover, the “prosecution” of a crime is commonly interpreted to include the trial of the offense, not just the investigation. Thus, it seems clear that this joint duty to protect is an on-going duty of both the Court and the Prosecu33. Code of Professional Conduct for Counsel, Resolution, ICC-ASP/4/Res.1 (Dec. 2, 2005). 34. Id. art. 8. 35. Id. arts. 12, 16. 36. Id. art. 7. 37. The OTP has a general duty to “uphold the highest standards of . . . integrity.” Regulations of the Office of the Prosecutor, ICC-BD/05-01-09, Regulation 17. 38. Illinois v. Gates, 462 U.S. 213 (1983). 39. MCCORMICK ON EVIDENCE § 111 (John W. Strong ed., 1999); see CAL. EVID. CODE §§ 1040-47 (West 2011). 40. Prosecution’s Document in Support of Appeal Against Trial Chamber I’s Decision of 8 July 2010 to Stay the Proceedings for Abuse of Process, supra note 13, ¶ 62. 41. Judgment, ¶ 48. 42. Under the Trial Chamber’s interpretation, the prosecution is no longer vested with any duty of protection once a Chamber is “seized of the matter and has ruled.” Trial Chamber Redacted Decision on Intermediaries, supra note 2, ¶ 29. 43. Rome Statute of the International Criminal Court, Article 68(1). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 146 THE INTERNATIONAL LAWYER tion.44 In view of the fact that the Court regulations require that any time the conditions of a protective measure are being altered, “the Chamber shall seek to obtain, whenever possible, the consent of the person” protected,45 and it appeared to the Prosecution that the Court was preparing to order disclosure without the party’s consent even though it might still be possible to get that consent, it is easy to see why they felt that they were in an ethical dilemma. In their decision, the Appeals Chamber clearly affirmed that the Trial Chamber orders must be followed46 and that the Prosecution’s “willful non-compliance constituted a clear refusal to implement the orders of the Chamber,” finding that the Prosecutor’s refusal to be “disingenuous.”47 However, this characterization belittles the nature of the Prosecution’s joint ethical obligation arising out of Article 68(1). The issue here was not what decision the Court made. The Court has to make the final decision, and the Prosecution did not contend otherwise. The issue here was how the decision was made. A trial court must make a myriad of decisions during a trial, and many decisions may be made summarily without extended consultation with the attorneys. However, it is generally recognized that when an objection is lodged by a party that a court order conflicts with an attorney’s ethical obligation, the Court should proceed carefully, giving increased deference to the party’s concern, and a chance for a full hearing on the issue. Every effort should be made to resolve the issue short of imposing sanctions.48 Taking such extra time at the trial level, even when it disrupts an already impacted trial schedule, usually pays off dividends when the case is reviewed by the Appeals Court. The Prosecution’s ethical obligation to protect a confidential witness in this case should have been viewed as solemnly as any of the ethical obligations of defense attorneys, and the dilemma which the Court’s order created for the OTP deserved more extensive consideration by the Court than it received. A decision whether or not to proceed with a particular charge or issue based on risk to an informant is one that the Prosecution is uniquely qualified to make. Courts generally do not consider it an insult or an affront to their authority when the Prosecution must make such a decision. Rather, courts will generally welcome such a decision in order to avoid putting themselves in the delicate position of feeling morally responsible if an informant whom they have ordered disclosed is subsequently the unfortunate victim of an untoward occurrence. 44. Prosecution’s Document in Support of Appeal Against Trial Chamber I’s Decision of 8 July 2010 to Stay the Proceedings for Abuse of Process, supra note 13, ¶¶ 62-64. 45. Regulations of the Court, ICC-BD/01-01-04, Regulation 42(4). 46. Judgment, ¶ 48. 47. Id. ¶ 46. 48. The prosecution suggested a number of alternate sanctions that could have been considered before the ultimate sanction of dismissal would apply, including exclusion of witnesses or evidence on particular issues (so-called “issues sanctions”) or a “partial dismissal” of one or more, but not all, separate charges. Each of these suggestions are consistent with established jurisprudence, but did not appear to have been considered by the Trial Chamber. Prosecution’s Document in Support of Appeal Against Trial Chamber I’s Decision of 8 July 2010 to Stay the Proceedings for Abuse of Process, supra note 13, ¶¶ 75, 82. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Family Law ROBERT G. SPECTOR AND BRADLEY C. LECHMAN-SU* I. International Conventions A. THE HAGUE CHILD SUPPORT CONVENTION On September 29, 2010, the U.S. Senate ratified The Hague Convention on the International Recovery of Child Support and other Forms of Family Maintenance, which concluded on November 23, 2007. Implementing legislation will be needed.1 B. THE 1996 CONVENTION ON PARENTAL RESPONSIBILITY AND MEASURES TO PROTECT CHILDREN On October 22, 2010, the United States signed the Hague Convention on Jurisdiction, Applicable Law, Recognition, Enforcement, and Co-operation in Respect of Parental Responsibility and Measures for the Protection of Children, concluded on October 19, 1996. The treaty will be implemented, in part, through a revision of the Uniform Child Custody Jurisdiction and Enforcement Act. C. THE 1993 HAGUE ADOPTION CONVENTION From June 17-25, 2010, a Special Commission met in The Hague to consider the operation of the Hague Convention on the Protection of Children and Co-operation in Respect of Intercountry Adoption. The conclusions and recommendations are too lengthy for this short article, but they can be found on the website of the Hague Conference.2 * Robert G. Spector is the Glenn R. Watson Chair and Centennial Professor of Law at the University of Oklahoma Law Center. Brad Lechman-Su is a shareholder in Lechman-Su & Quach, P.C., Portland, Oregon. 1. Hague Convention on International Recovery of Child Support and Family Maintenance, Nov. 23, 2007, S. TREATY DOC. NO. 110-21. 2. See Special Comm’n on the Practical Operation of the Hague Conv. of 29 May 1993 on Protection of Children and Co-operation in Respect of Intercountry Adoption, Conclusions and Recommendations, HAGUE CONFERENCE ON PRIVATE INT’L L., (June 25, 2010), http://www.hcch.net/upload/wop/adop2010concl_e. pdf. 147 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 148 THE INTERNATIONAL LAWYER D. THE HAGUE ABDUCTION CONVENTION Morocco became the first North African country to ratify the Hague Convention on the Civil Aspects of International Child Abduction and the treaty came into force between it and the United States on June 1, 2010.3 Seeking ways to prevent international child abductions, an international judicial conference on cross-border family relocation met in Washington, D.C. on March 23-25, 2010. The Hague Conference on Private International Law and the National Center for Missing and Exploited Children sponsored the Conference with the assistance of the State Department. “[M]ore than 50 judges and other experts from Argentina, Australia, Brazil, Canada, France, Egypt, Germany, India, Mexico, New Zealand, Pakistan, Spain, [the] United Kingdom, and the United States” attended the Conference.4 They agreed on the following declaration: Availability of Legal Procedures Concerning International Relocation 1. States should ensure that legal procedures are available to apply to the competent authority for the right to relocate with the child. Parties should be strongly encouraged to use the legal procedures and not to act unilaterally. Reasonable Notice of International Relocation 2. The person who intends to apply for international relocation with the child should, in the best interests of the child, provide reasonable notice of his or her intention before commencing proceedings or, where proceedings are unnecessary, before relocation occurs. Factors Relevant to Decisions on International Relocation 3. In all applications concerning international relocation, the best interests of the child should be the paramount (primary) consideration. Therefore, determinations should be made without any presumptions for or against relocation. 4. In order to identify more clearly cases in which relocation should be granted or refused, and to promote a uniform approach internationally, the exercise of judicial discretion should be guided in particular, but not exclusively, by the following factors listed in no order of priority. The weight given to any one factor will vary from case to case: i) the right of the child separated from one parent to maintain personal relations and direct contact with both parents on a regular basis in a manner consistent with the child’s development, except if the contact is contrary to the child’s best interest; ii) the views of the child, having regard to the child’s age and maturity; iii) the parties’ proposals for the practical arrangements for relocation, including accommodation, schooling, and employment; iv) where relevant to the determination of the outcome, the reasons for seeking or opposing the relocation; v) any history of family violence or abuse, whether physical or psychological; 3. 36 Fam. L. Rep. (BNA) 1287 (Apr. 27, 2010). 4. Int’l Judicial Conference on Cross-border Family Relocation, Washington Declaration on International Family Relocation, HAGUE CONFERENCE ON PRIVATE INT’L L., (Mar. 2010), http://hcch.e-vision.nl/up load/decl_washington2010e.pdf. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FAMILY LAW 149 vi) the history of the family and particularly the continuity and quality of past and current care and contact arrangements; vii) pre-existing custody and access determinations; viii) the impact of grant or refusal on the child, in the context of his or her extended family, education and social life, and on the parties; ix) the nature of the inter-parental relationship and the commitment of the applicant to support and facilitate the relationship between the child and the respondent after the relocation; x) whether the parties’ proposals for contact after relocation are realistic, having particular regard to the cost to the family and the burden to the child; xi) the enforceability of contact provisions ordered as a condition of relocation in the state of destination; xii) issues of mobility for family members; and xiii) any other circumstances deemed to be relevant by the judge. 5. While these factors may apply to domestic relocation, they are primarily directed to international relocation and thus generally involve considerations of international family law. 6. The factors reflect research findings concerning children’s needs and development in the context of relocation. The Hague Conventions of 1980 on International Child Abduction and 1996 on International Child Protection 7. It is recognized that the Hague Conventions of 1980 and 1996 provide a global framework for international co-operation in respect of cross-border family relocations. The 1980 Convention provides the principal remedy (the order for the return of the child) for unlawful relocations. The 1996 Convention allows for the establishment and (advance) recognition and enforcement of relocation orders and the conditions attached to them. It facilitates direct co-operation between administrative and judicial authorities between the two States concerned, as well as the exchange of information relevant to the child’s protection. With due regard to the domestic laws of the States, this framework should be seen as an integral part of the global system for the protection of children’s rights. States that have not already done so are urged to join these Conventions. Promoting Agreement 8. The voluntary settlement of relocation disputes between parents should be a major goal. Mediation and similar services to encourage agreement between the parents should be promoted and made available both outside and in the context of court proceedings. The views of the child should be considered, having regard to the child’s age and maturity, within the various processes. Enforcement of Relocation Orders 9. Orders for relocation and the conditions attached to them should be able to be enforced in the State of destination. Accordingly, States of destination should consider making orders that reflect those made in the State of origin. Where such authority does not exist, States should consider the desirability of introducing appropriate enabling provisions in their domestic law to allow for the making of orders that reflect those made in the State of origin. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 150 THE INTERNATIONAL LAWYER Modification of Contact Provisions 10. Authorities in the State of destination should not terminate or reduce the left behind parent’s contact unless substantial changes affecting the best interests of the child have occurred. Direct Judicial Communications 11. Direct judicial communications between judges in the affected jurisdictions are encouraged to help establish, recognize and enforce, replicate and modify, where necessary, relocation orders. Research 12. It is recognized that additional research in the area of relocation is necessary to analyze trends and outcomes in relocation cases. Further Development and Promotion of Principles 13. The Hague Conference on Private International Law, in co-operation with the International Centre for Missing and Exploited Children, is encouraged to pursue the further development of the principles set out in this Declaration and to consider the feasibility of embodying all or some of these principles in an international instrument. To this end, they are encouraged to promote international awareness of these principles, for example, through judicial training and other capacity building programmes.5 II. International Litigation A. THE HAGUE CONVENTION ON THE CIVIL ASPECTS OF INTERNATIONAL CHILD ABDUCTION As usual, most of the international family law cases in the United States involved the 1980 Hague Convention on the Civil Aspects of International Child Abduction and its implementing legislation, the International Child Abduction Recovery Act (“ICARA”).6 This treaty has more ratifications and accessions that any other family law treaty concluded under the auspices of the Hague Conference on Private International Law. The Hague Convention (the “Convention”) operates to return children to the State from where they were taken so that the State can determine issues of custody and visitation. To obtain a return order, first the petitioner must prove that the child was abducted from, or prevented from returning to, the country of the child’s habitual residence. Next, the petitioner must prove she had “a right of custody” under the law of the abducted-from State that is recognized under the Convention and that the petitioner was actually exercising those rights, or would have exercised those rights, but for the abduction. Jurisdiction is appropriate in either federal or state court. 5. Id. 6. See International Child Abduction Recovery Act, 42 U.S.C. §§ 11601-11611 (2011). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FAMILY LAW 151 1. Applicability of the Convention The Convention applies only to countries that have ratified or acceded to it. It cannot be made applicable to a case by the stipulation of the parties.7 The Convention ceases to apply when the child in question turns sixteen.8 2. Habitual Residence Neither the Abduction Convention nor any other Hague conventions define the term “habitual residence.” Courts have determined this “fact-based” issue in a number of cases. Because it is primarily a fact question, a trial court’s determination of habitual residence is reviewed using a clearly erroneous standard.9 The child, when born, normally has the habitual residence of its parents. The issue rarely comes up, but it did arise in one case during 2010. The First Circuit held that the child’s habitual residence was Australia immediately prior to a mother’s retention of the child in the United States, notwithstanding the mother’s alleged pre-birth declaration to the father that she would move back to the United States and that her alleged intent at the time of the child’s birth was not to remain in Australia. The child’s father was a citizen of Australia and was obliged to stay there during his military service. The mother, being pregnant, had returned to Australia to marry him. The mother and the father were married in Australia and were living together at the time of the child’s birth. Thereafter, the child lived in Australia for several months with both parents. Moreover, the mother was apparently willing to consider reconciliation with the father, even after her arrival in the United States.10 A number of cases this year revolved around whether the child’s habitual residence changed. Most courts determined that it had not. In a Fourth Circuit case, the Court upheld the lower court’s determination that the mother never intended to abandon the United States as the children’s habitual residence. The mother sought to return to the United States just five weeks after she arrived in Australia. She left many possessions in the United States and reserved round trip tickets for herself and the children. The mother and the children traveled with Australian tourist visas that limited their stay in Australia to three months. The mother “maintained her local financial accounts, North Carolina Medicare insurance, and the lease and insurance on her vehicle.”11 Another trial court erred in determining that Mexico was the child’s habitual residence because the child was too young to have become acclimatized. In addition, there was no evidence that the parents shared intent to make Mexico the child’s habitual residence.12 In Haro v. Woltz, however, the court determined that the evidence was conflicting concerning whether the child was to stay with the father in Wisconsin for one year and then 7. In re Kamstra, No. 12-09-00017-CV, 2010 WL 708857 (Tex. Ct. App. Mar. 2, 2010). 8. See In re R.P.B, No. CA2009-07-097, 2010 WL 339812, at *2 (Ohio Ct. App. Feb. 1, 2010). 9. Courdin v. Courdin, No. CA09-780, 2010 WL 1486933 (Ark. App. June 2, 2010). 10. Nicolson v. Pappalardo, 605 F.3d 100, 105 (1st Cir. 2010). See also Sewald v. Resinger, 2009 WL 6767881 (11th Cir. Nov. 19, 2009) (child born in Germany to an estranged couple is a habitual resident of that country since the parents must have understood that, absent a reconciliation, the child would be living in Germany). 11. Maxwell v. Maxwell, 588 F.3d 245, 253 (4th Cir. 2009). 12. In re J.G., 301 S.W.3d 376, 382 (Tex. App. 2009). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 152 THE INTERNATIONAL LAWYER return to Mexico, or whether the child was to stay in Wisconsin for an indefinite period.13 The court, believing the father, determined that the habitual residence had shifted because there was no shared intent that the child should stay only one year. This seems to turn the Mozes v. Mozes approach to habitual residence on its head. Mozes required that before the child’s habitual residence can shift, the parents must share intent to change the residence.14 In this case, the court apparently determined that the year the child spent in Wisconsin was sufficient to shift habitual residence absent a shared parental intent that it not shift. 3. Rights of Custody In a major decision, the U.S. Supreme Court determined that a ne exeat provision, in a decree or applicable law, is a right of custody under the Convention.15 Ms. Abbott had claimed that a ne exeat right could not qualify as a right of custody because the Convention requires that any such right be capable of “exercis[e].” This argument, the Court concluded, was misplaced. When one parent removes a child without seeking the ne exeat holder’s consent, it is an instance where the right would have been “exercised but for the removal or retention.” The Fifth Circuit’s conclusion that a breach of a ne exeat right does not give rise to a return remedy would, the court said, “render the Convention meaningless in many cases where it is most needed.”16 Any suggestion that a ne exeat right is only a right of access, or visitation, does not comport with article 5(b) of the Convention that defines a right of access as a “right to take a child for a limited period of time.”17 The Court also noted that the conclusion that a ne exeat right is a right of custody, is strongly supported “by the longstanding view of the State Department’s Office of Children’s Issues . . . that ne exeat rights are rights of custody.”18 Finally, the Court found it to be important that most of our treaty partners have also defined a ne exeat provision as a right of custody. This view supports uniform international interpretation of the treaty. Lower federal courts since Abbott have followed suit. The effect of these decisions is to provide a right of custody in non-custodial parents where the law of the State is that a child may not be taken out of the State without the consent of the parent or the court. 4. Consent A mother who allowed her daughter to travel to the United States for a two-month stay with the child’s paternal grandmother did not consent to the child’s staying in the United States with her father at the end of the visit.19 But, a father who gave the mother his written approval for her to move to the Ukraine with the child, purchased one-way airline 13. 14. 15. 16. 17. 18. 19. Haro v. Woltz, No. 10-C-389, 2010 WL 3279381, at *4 (E.D. Wis. Aug. 19, 2010). Mozes v. Mozes, 239 F.3d 1067, 1074-76 (9th Cir. 2001). Abbott v. Abbott, 130 S. Ct. 1983, 1990 (2010). Id. Id. Id. Sullivan v. Sullivan, No. CV-09-545-S-BLW, 2010 WL 227924, at *6 (D. Idaho Jan. 13, 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FAMILY LAW 153 tickets for them, provided them money to purchase a home there, and never sought to enforce his custody rights in the Ukraine, clearly consented to the removal.20 A father who consented to a Maine “protection from abuse order,” which granted temporary custody to the mother, did not acquiesce to the child remaining in Maine. The proceedings were ambiguous on the question of the father’s subjective intent to consent to the wife’s removal of the child.21 5. Wrongful Retention Where the grandparents of the child testified that the Canadian mother would be free to take the child back to Canada if she came to the grandparent’s home in Missouri, a court can stay proceedings to see if that is actually the case. If, however, the grandparents refused to allow the child to return with the mother, the court would conclude the child is being retained in Missouri and set the case for a final hearing.22 6. Defenses a. Settled in New Environment A respondent may assert a number of defenses to prevent a child from being returned. One defense in Article 12 of the Convention provides that judicial authorities of the abducted-to country need not return the child if 1) more than one year has elapsed between the abduction or retention and the filing of the petition for return and 2) the child is settled in the child’s new environment. The one-year period runs from the wrongful retention or removal. A father who “knew something was wrong” before his wife actually told him she was not returning from the United States was on notice that the mother might not return. The one-year period, therefore, should be measured from that point and not when the mother actually communicated her decision not to return.23 Two children, ages first-grade and younger, did not have to be returned to the Bahamas when the trial court found they were well settled in Texas. The children lived “close to extended family with which they had significant contact.”24 They participated in activities, attended Sunday school, and went to church regularly. The older child had already attended one year of school and was enrolled in first grade. “Although the mother and step-father were unemployed at the time of the hearing, they both testified to their efforts to gain employment and are employable.”25 A two-year-old child was not so settled in a new environment that he could not be returned to Germany, especially when the father did not show that the child had established significant connections to the United States.26 Similarly, in Luttman v. Luttman, even though the child had resided in the United States for almost two years, the child was not well settled. He had resided in three different locations and attended three different 20. Chechel v. Brignol, No. 5:10-cv-164-Oc-10GRJ, 2010 WL 2510391, at *2, *6 (M.D. Fla. June 21, 2010). 21. Nicolson v. Pappalardo, 605 F.3d 100, 108 (1st Cir. 2010). 22. Mitsuing v. Lowry, No. 4:09CV02124ERW, 2010 WL 1610418, at *11-12 (E.D. Mo. Apr. 21, 2010). 23. Etienne v. Zuniga, No. C10-5061BHS, 2010 WL 2262341, at *10 (W.D. Wash. June 2, 2010). 24. Edoho v. Edoho, No. H-10-1881, 2010 WL 3257480, at *6 (S.D. Tex. Aug. 17, 2010). 25. Id. 26. Riley v. Gooch, No. 09-1019-PA, 2010 WL 373993, at *12 (D. Or. Jan. 29, 2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 154 THE INTERNATIONAL LAWYER schools, had a handful of acquaintances, had not established connections to any church or synagogue, and had not engaged in any extracurricular activities. He had no other community involvement in central Pennsylvania and spent most of his time watching television and playing video games.27 The court also found that even if the child were well settled, the court would exercise its discretion not to return the child because: [The father] has engaged in behavior that is manipulative and otherwise contravenes the purposes of the Hague Convention, and he should not be rewarded for such behavior. At the last minute, [he] unilaterally decided not to return D.L. to Israel, and he has confirmed his intent to keep D.L. in the United States permanently, with no regard for [the mother’s] custody rights. Worse, [he] brought a baseless complaint of sexual abuse to authorities during [the mother’s] visit . . . in a desperate attempt to maintain control of D.L.’s custody. [His] improper conduct also compels the court to exercise its discretion to return D.L. to Israel.28 b. Preference of the Child A second defense, in Article 13, provides that the child need not be returned if “the child objects to being returned and has attained an age and degree of maturity at which it is appropriate to take account of its views.”29 A trial court acted within its discretion in finding that an eight-year-old child had attained an age and degree of maturity at which it was appropriate to take account of his views on whether he should be returned to Chile. The trial court’s finding that the child was sufficiently mature was a factual issue for which deferential appellate review was appropriate. The California Court of Appeals rejected an attempt to establish a bright-line rule that it was not appropriate to take account of the views of children aged nine or younger.30 In another case, a fourteen-year-old child was found to be of sufficient age and maturity that he did not have to be sent back to Mexico. The retaining parent had not influenced the child’s choice and he expressed the view that he “enjoy[ed] the freedom of living in a safe neighborhood where he is allowed to visit friends on his own without fear for his safety,” which had concerned him in Mexico.31 He had also developed a close relationship with his stepmother and his new nine-month-old half-sister.32 A federal district court, however, returned a fifteen-year-old child to Germany, even though it found that the child was mature enough to express an opinion and wished to remain in the United States. The court found that the child’s decision reflected the product of limited analysis. For example, his primary reason for deciding to stay in the United States was his online computer communication with his brother. The brother reportedly stated that the petitioner, upon learning that respondent had taken the child to the United States, said he would seek to have the child suspended from his German school. Moreover, although the child claimed he received better grades in his new school in Greensboro, the school days were very limited in the three-to-four week period that the child was 27. Lutman v. Lutman, No. 1:10-CV-1504, 2010 WL 3398985, at *6 (M.D. Pa. Aug. 26, 2010). 28. Id. at *7. 29. Convention on the Civil Aspects of International Child Abduction art. 13, Oct. 25, 1980, available at http://www.hcch.net/upload/conventions/txt28en.pdf. 30. Escobar v. Flores, 107 Cal. Rptr. 3d 596, 605 (Cal. Ct. App. 2010). 31. Haro v. Woltz, No. 10-C-389, 2010 WL 3279381, at *4 (E.D. Wis. Aug. 19, 2010). 32. Id. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FAMILY LAW 155 enrolled. In the end, the court found that the child’s decision to remain here might have been influenced in large measure by the fact that his mother, with whom he wished to stay, was staying with a boyfriend in Greensboro.33 In yet another case, the preference of the older child to stay in the United States was based on his desire not to be separated from his younger brother. Since the younger child was not of sufficient age to express an opinion and was ordered returned to England, the court found that the older child’s preference could be followed by returning him to England also. The court also noted, “[f]rankly, short of opining as to a mental or emotional pathology, it is hard to fathom what a psychologist in a Hague Convention case could opine that is not already within the ken of an ordinary finder of fact.”34 The court had previously determined that the respondent could not call a “marriage and family therapist” to impeach the testimony of petitioner’s psychologist since the therapist was not a psychologist.35 c. Grave Risk of Harm A third defense is contained in Article 13(b) and provides that a child need not be returned if the child would be subjected to a great risk of psychological or physical harm.36 The respondent is required to prove this defense by clear and convincing evidence.37 A father did not establish by clear and convincing evidence that there was a grave risk of harm in returning his daughter to Panama, her country of habitual residence, to live with her mother. The father testified that the home where the mother lived had no indoor running water, no climate control, no refrigeration, and very little furniture. He also testified that the child suffered a head injury while in the mother’s care and that the child exhibited ataxia. But, the court found that poverty was not a reason to deny relief to the mother, that even well cared for children occasionally had accidents, and there was no evidence the child was undergoing regular medical treatment in the United States. Furthermore, any attachment of the child to the United States and her father was not a valid consideration under the Convention’s grave danger exception. Neither was the father’s speculative and unsubstantiated concern about whether he could receive a fair trial in the Panamanian courts.38 In another case involving Panama, the court found there was not a grave risk of harm to the child because the father had been convicted of felony burglary and stealing firearms fourteen years ago. The evidence showed that the father had been rehabilitated, had no serious law violations since that time, and had become a responsible citizen.39 In another case involving Mexico, the mother’s testimony concerning the father’s alleged physical abuse was rebutted by the fact that she never took the child to a doctor nor was there anything in the child’s medical history that indicate that abuse took place.40 33. 34. 35. 36. 37. 38. 39. 40. Trudrung v. Trudrung, 686 F. Supp. 2d 570, 577 (M.D. N.C. 2010). Haimdas v. Haimdas, 720 F.Supp. 2d 183, 207 n.17 (E.D. N.Y. 2010). Haimdas v. Haimdas, No. 09-CV-02034, 2010 WL 652823 (E.D. N.Y. Feb. 22, 2010). Convention on the Civil Aspects of International Child Abduction art. 13. 42 USC §11603(e)(2)(A) (2010). Cuellar v. Joyce, 596 F.3d 505, 510 (9th Cir. 2010). Fernandez v. Bailey, No. 1:10CV00084 SNLJ, 2010 WL 3522134, at *2-3 (E.D. Mo. Sept. 1, 2010). Vasquez v. Colores, No. 10-3669, 2010 WL 3717298 (D. Minn. Sept. 14, 2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 156 THE INTERNATIONAL LAWYER One federal district court found that the child’s attachment to the abducting mother meant that the child would be at risk if returned to Spain. Nevertheless, based on the father’s undertakings that he would rent an apartment for the mother, agree not to press criminal charges against her, and pay her _500 a month until the Spanish court issued a support order, the court determined that the risk was not “grave” under the Convention and ordered the child returned.41 But, another federal district court did not order children returned to Cyprus when the children suffered from post-traumatic stress syndrome after witnessing the father’s constant abuse of the mother. The evidence showed that Cyprus authorities were unable to protect the mother from further abuse. The mother had previously been granted asylum in the United States based on the father’s physical abuse.42 d. Other Attempted Defenses The fact that a father had a custody order from Pennsylvania did not excuse his selfhelp removal of the child from the Netherlands. The court held that he should have registered the custody order in the Netherlands and sought to have it enforced there.43 7. Enforcement A return order should not generally be stayed pending appeal, unless there is a specific concern as to whether the parent who sought the return will also abscond with the child, instead of having custody determined in the state from which the child was taken.44 Nor does the fact that children have been returned to their country of origin moot an appeal from a Hague return proceeding.45 A federal district court did not have subject matter jurisdiction to enforce a return order from Ukraine, which ordered the child returned to Poland, because Ukraine had not acceded to the Convention when the order was rendered.46 8. Other Issues under the Convention and ICARA a. Attorney Fees A prevailing petitioner in a return action is entitled to attorney fees47 even if the representation was pro bono.48 But, because a prevailing mother did not produce evidence that no attorneys in the area could handle her case, fees charged by attorneys from outside the area had to be reduced to be more commensurate with fees charged by local attorneys.49 41. Rial v. Rijo, No. 1:10-cv-01578-RJH, 2010 WL 1643995, at *2-3 (S.D.N.Y. Apr. 23, 2010). 42. Miltiadous v. Tetervak, 686 F. Supp. 2d 544, 552 (E.D. Pa. 2010). 43. The court held in a matter of first impression that the equitable doctrine of “clean hands” cannot be used to deny a return order when the petitioner makes a prima facie case and no Convention defenses apply. Karpenko v. Leendert, No. 09-03207, 2010 WL 831269, at *7 (E.D. Pa. Mar. 4, 2010). 44. See id. 45. In re J.G., 301 S.W.3d 379, 380 (Tex. App. 2009). 46. Czupinka v. Greczuch, No. 09-CV-4454, 2010 WL 3394276, *2 (E.D. N.Y., July 19, 2010). 47. 43 U.S.C. § 11607(b)(3) (2011). 48. Cuellar v. Joyce, 603 F.3d 1142, 1143 (9th Cir. 2010). 49. Olesen-Frayne v. Olesen, No. 2:09-cv-49-FtM-29DNF, 2009 WL 3048451, *2 (M.D. Fla. Sept. 21, 2009). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FAMILY LAW 157 In another case, the court determined that a fee award that unduly limits respondent’s ability to support her children would be “clearly inappropriate.” Legal fees billed to a prevailing father by his attorneys were reasonable and appropriate, but were reduced by twenty-five percent for purposes of the fee award. The fees were reduced because the mother was unemployed, had only nominal assets, was a pregnant stay-at-home mother, and was the primary caretaker of her three other children, ages twelve years, two years, and eight months.50 Fees awarded to a mother to cover her costs in obtaining the return of her child from Turkey do not constitute “child support” under Maryland law. The mother was not entitled, therefore, to a Qualified Domestic Relations Order to enforce her attorney fee award.51 b. Procedural Issues A petition for the return of a child, filed in North Carolina state court, must be verified for the court to have subject matter jurisdiction.52 Denial of a petition to return the child does not necessarily give a state court jurisdiction to decide the custody issues. Therefore, when a mother’s petition was denied in an Arkansas state court, jurisdiction to decide custody was still appropriate in Missouri.53 B. THE HAGUE SERVICE CONVENTION54 A husband’s failure to serve his wife in Mexico in accordance with the Hague Service Convention, the exclusive means of service upon a Mexican citizen in Mexico, means that court failed to obtain personal jurisdiction over the wife. Therefore, all subsequent actions of the court were a nullity.55 The failure to serve a husband in accordance with the Convention also meant that a default judgment against the husband must be vacated.56 The California Court of Appeals ruled that the Service Convention does not apply to notice of review hearings in juvenile cases.57 Another California court held that a father who had made a general appearance in juvenile dependency proceedings filed by the county was not entitled to receive notice of a dispositional hearing. After the father was deported to Mexico, the court held that his general appearance was equivalent to personal service of summons and waived any right, pursuant to The Hague Service Convention, to challenge adequacy of notice to subsequent and supplemental petitions filed in the proceedings.58 50. Salinier v. Moore, No. 10-cv-00080-WYD, 2010 WL 3515699, *4 (D. Colo. Sept. 1, 2010). 51. Roosevelt v. Corapcioglu, 2 A.3d 1095, 1101 (Md. 2010). 52. Obo v. Steven B., 687 S.E. 2d 496, 500 (N.C. Ct. App. 2009). 53. Courdin, 2010 WL 1486933. 54. See generally Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, Nov. 15, 1965, 20 U.S.T. 361. 55. Velasco v. Ayala, 312 S.W. 3d 783, 799 (Tex. Ct. App. 2010). 56. In re Marriage of Li, No. A124639, 2010 WL 9071, at *3 (Cal. Ct. App. Jan. 4, 2010). 57. In re Jennifer O., 108 Cal. Rptr. 3d 846, 847 (Cal. Ct. App. 2010). 58. Kern Cnty. Dep’t of Human Serv. v. Superior Court, 113 Cal. Rptr. 3d 735, 737 (Cal. Ct. App. 2010). See also In re B.C., No. F07939, 2010 WL 2282055, at *12 (Cal. Ct. App. June 8, 2010) (the provisions of the Service Convention are waived when an individual acquiesces to the juvenile court’s jurisdiction and actively SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 158 THE INTERNATIONAL LAWYER Based on the discovery of a mistranslation of Mexico’s original declarations to Articles 10, service under the Convention through Mexico’s Central Authority (no mail) is the exclusive means of service in Mexico.59 C. OTHER CASES INVOLVING INTERNATIONAL FAMILY LAW LITIGATION 1. Premarital Agreements A mahr agreement is a prenuptial agreement based on Islamic law that provides an immediate and long-term dowry to the wife. A mahr was declared invalid under Washington’s contract law because there was no meeting of the minds on the essential terms of the agreement, no term promising to pay, and no term explaining why or when the money would be paid to the wife. The husband was not told that he would be required to participate in a ceremony that would include the signing of a mahr until fifteen minutes before he signed it and was unaware of the terms of the agreement until an uncle explained them to him after the mahr had been signed.60 2. Divorce-Recognition of Foreign Judgments and Divorce A couple’s domesticated Canadian divorce decree that provided for attorney fees to the prevailing party in any support action survived a subsequent Canadian order annulling the marriage.61 Quasi-estoppel barred a motion for post-decree relief to vacate a divorce decree. The wife brought the action against her husband on the grounds that a Dominican Republic divorce decree from his previous marriage was invalid, and thus that their own marriage was void. The court held that it would decline to recognize the decree on the basis of comity, as neither the husband nor his former wife were domiciled in the Dominican Republic at the time of the divorce. The court held, however, that the wife was quasiestopped from prevailing on her claim. She waited eleven years from the time they were married, and over four years after their divorce decree was entered, to bring her action to vacate the decree, even though she had full knowledge of the Dominican Republic divorce decree and had met the former wife after marrying her husband.62 3. Children’s Issues a. Adoption A California court lacked jurisdiction to vacate a California couple’s adoption of a Ukrainian child that took place in Ukraine.63 participates in proceedings); In re Vanessa Q., 114 Cal. Rptr. 3d 294, 300 (Cal. Ct. App. 2010) (defendant’s entry of a general appearance in the trial court cures the defective service). 59. OGM, Inc. v. Televisa, SA. DE C.V., No. CV 08-5742-JFW (JCx), 2009 WL 1025971, at *3 (C.D. Cal. Apr. 15, 2009). 60. In re Marriage of Obaidi, 226 P.3d 787, 788 (Wash. Ct. App. 2010). 61. Deegan v. Taylor, 28 So.3d 227, 229 (Fla. Dist. Ct. App. 2010). 62. Cvitanovich–Dubie v. Dubie, 231 P.3d 983, 997 (Haw. Ct. App. 2010). 63. Adoption of M.S. v. Cal. Dep’t of Social Serv., 103 Cal. Rptr. 3d 715, 723 (Cal. Ct. App. 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FAMILY LAW 159 Under Michigan choice of law principles, Virginia law applied to tort claims asserted by Virginia adoptive parents against a Michigan adoption agency over the adoption of a Russian child. Virginia’s interest in having its substantive law applied to its citizens’ claims was greater than Michigan’s interest in having its substantive law applied to nonresidents’ claims against its corporate domiciliaries. The Virginia parents reviewed, signed, and submitted their international adoption agreements in Virginia, to an adoption agency licensed and registered in Virginia. The office presentation and face-to-face discussions before the parents entered into the contract took place in Virginia, as did the communication and contact between the parties for the family adoption assessment, and where complaint did not allege that any tortuous conduct was committed in Michigan.64 Documents issued by the Cambodian government could not nullify the father’s parental rights in New York because the documents were not “acts of state” under the act of state doctrine. The documents were not acts done within Cambodia’s own territory because all three of the people the documents would have affected were living in New York. The documents purported to terminate a New York adoptive father’s parental rights over Cambodian child who was living with the father in New York and to authorize the child’s adoption by another New York citizen.65 b. Criminal Law In United States v. Newman, the defendant was properly convicted of violating the International Parental Kidnapping Crime Act.66 He took his three-year-old son out of the country after a divorce court awarded custody to his ex-wife. The “father’s disregard of the custody order and removal of [the] child in direct violation thereof was [a] ‘substantial interference with the administration of justice’ of [the] kind warranting a three-level increase in his base offense level. His conduct was calculated to thwart the legal custody process and to ensure that he, and not [the] judge with jurisdiction over [the] custody matters, would be [the] ultimate decision maker about who had custody of child.”67 c. Custody i. Jurisdiction A trial court has no jurisdiction to determine the custody of a child whose home state is Japan.68 California properly refused to recognize a Russian order modifying a California custody determination. The father continued to reside in California, and there was no decision by a California court holding that California had lost jurisdiction. The court also found that the mother did not defeat California’s continuing jurisdiction by unilaterally removing the child from California to Russia in violation of a court order not to remove the child from the state.69 64. Harshaw v. Bethany Christian Serv., 714 F. Supp. 2d 751, 752 (W.D. Mich. 2010). 65. In re Adoption of Doe, 923 N.E.2d 1129, 1132-33 (N.Y. 2010). 66. See 18 U.S.C. § 1204 (2011). 67. See United States v. Newman, 614 F.3d 1232, 1232 (11th Cir. 2010). 68. In re Marriage of Richardson, 102 Cal. Rptr. 3d 391, 392 (Cal. Ct. App. 2009). See also Sanjuan v. Sanjuan, 892 N.Y.S.2d 146 (N.Y. App. Div. 2009) (New York may not determine the custody of a child whose home state is the Philippines). 69. In re Marriage of Ozerets, No. DO56210, 2010 WL 2473259, at *13 (Cal. Ct. App. June 18, 2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 160 THE INTERNATIONAL LAWYER A California juvenile court abused its discretion by failing to order measures to enforce its continuing jurisdiction when it retained dependency jurisdiction over a child, but placed her with her noncustodial father in Peru. The record did not show that the Hague Convention on the Civil Aspects of International Child Abduction would necessarily guarantee the child’s return to California upon the juvenile court’s petition. On remand, the juvenile court was required to consider evidence regarding recognition and enforcement of the juvenile court’s continuing jurisdiction under the laws of Peru. At a minimum, its measures to ensure enforceability of its continuing jurisdiction and orders should include a requirement that the “father . . . expressly concede the juvenile court’s jurisdiction throughout the pendency of the dependency case.”70 A California trial court abused its discretion by requiring a mother to post a $50,000 bond before relocating with the child to her home country of South Korea. The mother was unemployable in the United States. To insist upon the bond would mean she would be unable to relocate.71 An Illinois court erred in finding that it had exclusive, continuing jurisdiction over its 2002 custody decree where the subject child’s divorced father had filed a 2009 custody action in India. The Indian court had found that the parents and child were “now ordinarily residing” in that country; therefore, Illinois lost its exclusive continuing jurisdiction.72 ii. Substantive Custody Determinations It is not error to award joint custody even though the mother had previously abducted her child to Germany and was ordered to return to the United States.73 iii. Visitation A trial court did not err in awarding the father custody and the mother-supervised visitation because she posed a risk of abducting the child. The mother was a citizen of Morocco, which at the time was not a signatory of the Hague Abduction Convention. Her father was a law enforcement officer in Morocco, her sister worked for an airline servicing the Middle East, and the mother had obtained a Moroccan passport.74 d. Parentage and Child Support Even though California had no jurisdiction to determine custody of a child whose home state was Japan, it did have jurisdiction to determine support for the child under the Uniform Interstate Family Support Act (“UIFSA”).75 A New York court has jurisdiction under UIFSA to determine if a Canadian biological mother’s same-sex partner should be responsible for child support.76 70. 71. 72. 73. 74. 75. 76. In re Karla C., 113 Cal. Rptr. 3d 163, 189 n.26 (Cal. Ct. App. 2010). In re Marriage of Mundkowsky, No. B215472, 2010 WL 3278964, at *7 (Cal. Ct. App. Aug. 20, 2010). In re Marriage of Akula, 935 N.E.2d 1070, 1079 (Ill. App. Ct. 2010). See White v. White, 898 N.Y.S.2d 8 (N.Y. App. Div. 2010). Lee v. Lee, No. 2080905, 2010 WL 1539733, at *3 (Ala. Civ. App. Apr. 16, 2010). In re Marriage of Richardson, 102 Cal. Rptr. 3d 391, 392 (Cal. Ct. App. 2009). H.M. v. E.T., 930 N.E.2d 206, 209 (N.Y. 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FAMILY LAW 161 A Bermuda child support order is enforceable in Pennsylvania even though the order came from a country that was not in a reciprocal agreement with the United States. Under principles of comity, the case should be set for a hearing.77 4. Other Cases In Alaska, courtship debts, including the expenses of bringing the wife from Belarus to the United States, are the separate debt of the person who incurred them because the first date a marital debt can be incurred is the date of the marriage.78 The husband, however, was not required to pay alimony under an Affidavit of Support, because the wife earned more than 125% of the federal poverty level. The husband had executed an Affidavit of Support pursuant to the Immigration and Nationality Act as part of the wife’s application for permanent residency in the United States. Even though no support was required under the affidavit, the court remanded the case to determine whether the wife would be entitled to alimony under Alaska state law.79 In Tennessee, a court enforced, in a divorce proceeding, the husband’s affidavit of support for his immigrant wife. The court stressed that this was not alimony and ordered the wife to find a job and apply to become a United States citizen.80 A California court determined that an English order requiring a husband to pay his wife’s attorney fees was not enforceable under the Uniform Foreign-Country Money Judgments Act because that Act specifically excludes judgments for “support in matrimonial or family matters.”81 A Florida appellate court vacated an ex parte injunction in the wife’s divorce case, which enjoined access to $100 million on deposit in Florida banks. The money belonged to international companies, owned in part by the woman’s Taiwanese husband. The court determined that the injunction violated the rights of the companies and the wife failed to show irreparable harm that was necessary for the ex parte injunction.82 In Maine, it is permissible to appoint a receiver to sell the property ordered sold by the court, especially when the husband is out of the country with no intention of returning.83 77. Scully v. Scully, No. FD 09-4807-003, 2010 WL 1444838, at *395 (Pa. Com. Pl. Jan. 6, 2010). 78. Id. 79. Barnett v. Barnett, 238 P.3d 594, 603 (Alaska 2010). 80. Baines v. Baines, No. E2009-00180-COA-R3-CV, 2009 WL 3806131, at *5 (Tenn. Ct. App. Nov. 13, 2009). 81. In re Marriage of Lyustiger, 99 Cal. Rptr. 3d 922, 923 (Cal. Ct. App. 2009). See also Sanchez v. Palau, 317 S.W.3d 780 (Tex. Ct. App. 2010) (Mexican divorce cannot be recognized under the Uniform ForeignCountry Money Judgments Act.). 82. American Univ. of the Caribbean v. Tien, 26 So.3d 56, 59 (Fla. Dist. Ct. App. 2010). 83. Howard v. Howard, 2 A.3d 318, 321 (Me. 2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Litigation EDITED BY: ELAINE METLIN & EKATERINA SCHOENEFELD* AUTHORED BY: NEALE H. BERGMAN, JONATHAN I. BLACKMAN, CARMINE D. BOCCUZZI, LORRAINE DE GERMINY, PHILLIP DYE, JR., WILLIAM LAWRENCE, MATTHEW D. SLATER, KAREN WOODY, AND HOWARD S. ZELBO I. Foreign Sovereign Immunities Act A. FSIA BEFORE THE SUPREME COURT** Under the Foreign Sovereign Immunities Act (“FSIA”), a foreign state is immune from suit, and its property from execution, unless an exception applies.1 In Samantar v. Yousuf, the Supreme Court resolved the circuit split on whether FSIA governs questions of immunity of foreign officials acting in their official capacities, holding that they are governed by the common law, not the FSIA.2 Finding no reason to believe that Congress wanted to eliminate the State Department’s role in foreign official immunity determinations, the Court declined to define “the precise scope of an official’s immunity at common law” and remanded for further proceedings.3 The Court emphasized the narrowness of its holding, noting that not every case “can be successfully pleaded against an individual official alone,” and that the FSIA might apply if a foreign state is a required party under Federal Rule of Civil Procedure (“FRCP”) 19(a)(1)(B) or if a suit is against a foreign official where the state is the real party in interest.4 * Elaine Metlin is a Partner at Dickstein Shapiro LLP, Washington, D.C. Ekaterina Schoenefeld is the owner of Schoenefeld Law Firm LLC, Princeton, New Jersey. ** Contributed by Jonathan I. Blackman, Partner, and Carmine D. Boccuzzi, Partner, Cleary, Gottlieb, Steen & Hamilton LLP in New York, New York, with assistance from Ann Nee and Michael Brennan, both associates at the same firm. 1. Foreign Sovereign Immunities Act, 28 U.S.C. §§ 1604, 1609 (2011). 2. Samantar v. Yousuf, 130 S. Ct. 2278, 2285-93 (2010). 3. Id. at 2289-93. Previously, a foreign state could request a “suggestion of immunity” from the State Department, which, if granted, led the court to surrender its jurisdiction. Id. at 2284. Otherwise, the court had authority to decide whether immunity existed. Id. 4. Id. at 2292 n.20 (plaintiffs must establish personal jurisdiction over foreign officials without recourse to the FSIA’s service of process or jurisdiction provisions); see also In re Terrorist Attacks on Sept. 11, 2001, 718 F. Supp. 2d 456, 495 (S.D.N.Y. 2010) (dismissing foreign officials for lack of personal jurisdiction); Abi Jaoudi & Azar Trading Corp. v. Cigna Worldwide Ins. Co., 391 F. App’x 173, 181 (3d Cir. 2010). 163 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 164 THE INTERNATIONAL LAWYER B. EXCEPTIONS TO JURISDICTIONAL IMMUNITY 1. The Commercial Activity Exception The commercial activity exception to jurisdictional immunity under Section 1605(a)(2) provides that a foreign state is not immune from suit where it has engaged in one of the enumerated categories of commercial activity.5 For example, the refusal by a state to honor an agreement that payment could be demanded anywhere might constitute a “direct effect” under the statute.6 Additionally, a state’s actions preventing a U.S. corporation from entering into contractually required subcontracts with two U.S. entities causing lost profits was a direct effect because they were guaranteed and the subcontracts had sufficient connections to the United States.7 Conversely, a successor state’s automatic succession to a prior state’s liability does not constitute sufficient “activity,” but an affirmative assumption of liability, e.g., through passage of a treaty and legislation agreeing to honor the debts of the prior state.8 In Guevara v. Peru, the Eleventh Circuit declined to find that a sovereign’s failure to pay a reward within the U.S. was a form of “negative activity” constituting a “direct effect.”9 In Guirlando v. T.C. Ziraat Bankasi A.S., the Second Circuit found no “direct effect” where a U.S. citizen caused money to be transferred out of the United States and where a foreign sovereign’s alleged negligence allowed a third party to steal that money.10 In Cruise Connections Charter Management 1, LP v. Attorney General of Canada, where a foreign state’s actions prevented a U.S. corporation from entering into contractually required subcontracts with two U.S. entities, the court found that the corporation’s lost profits were a “direct effect” under Section 1605(a)(2) because they were guaranteed, and the subcontracts had sufficient connections to the United States.11 2. The Expropriation Exception In Cassirer v. Spain, the Ninth Circuit, sitting en banc, held that the expropriation exception may apply if property is “taken” by an entity other than the foreign state, that a state art foundation’s promotion in the United States of the museum and the painting at issue constituted commercial activity, and that Section 1605(a)(3) did not mandate local exhaustion of remedies.12 5. 28 U.S.C. § 1605(a)(2) (2011). Commercial activity is different from “sovereign activity,” which does not fall under this exception. See Anglo-Iberia Underwriting Mgmt. Co. v. P.T. Jamsotek (Persero), 600 F.3d 171, 178 (2d Cir. 2010) (foreign state acting as the state’s “default health insurer” is sovereign activity). See also In re Potash Antitrust Litig., 686 F. Supp. 2d 816, 822 (N.D. Ill. 2010) (foreign state’s reduction of exports is sovereign activity). 6. DRFP L.L.C. v. Venezuela, 622 F.3d 513, 516-17 (6th Cir. 2010). 7. Cruise Connections Charter Mgmt. 1, LP v. Atty Gen. of Canada, 600 F.3d 661, 662-65 (D.C. Cir. 2010). 8. Mortimer Off Shore Servs., Ltd. v. Federal Republic of Germany, 615 F.3d 97, 106-07, 110 (2d Cir. 2010). 9. Guevara v. Peru, 608 F.3d 1297, 1310 (11th Cir. 2010). 10. Guirlando v. T.C. Ziraat Bankasi A.S., 602 F.3d 69, 78, 81-82 (2d Cir. 2010). 11. Cruise Connections, 600 F.3d at 664-65. 12. Cassirer v. Spain, 616 F.3d 1019, 1037 (9th Cir. 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL LITIGATION 165 II. Service of Process Abroad*** FRCP Rule 4(f) allows service outside the United States “by any internationally agreed means of service that is reasonably calculated to give notice, such as those authorized by the Hague Convention.”13 If ratified, the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents (“Hague Convention”) provisions are the exclusive means to effectuate process.14 A. SERVICE OF PROCESS BY INTERNATIONAL MAIL Article 10(a) of the Hague Convention provides that, as long as a foreign state “does not object, the present Convention shall not interfere with . . . send[ing] judicial documents, by postal channels, directly to persons abroad.”15 In Knit With v. Knitting Fever, Inc., a district court applied Article 10(a), finding that service in Italy was improper because Italian law does not permit an attorney to use a private mail carrier for service of process, and service in England was improper because the plaintiff did not comply with Rule 4(f)(2)(C)(ii), requiring a court clerk to send the documents.16 B. IMPROPER SERVICE International service of process must comply with the host country’s laws. In Marcus Food Co. v. DiPanfilo, a Canadian defendant unsuccessfully challenged a default judgment on grounds of improper service.17 Because Article 10(b) of the Hague Convention allows “competent persons” to effect service if the destination state has not objected and Canada failed to object, the court upheld service.18 In GMA Accessories, Inc. v. Solnicki, the plaintiff attempted service on the defendant in Argentina with a subpoena through a local attorney.19 Article 19 of the Hague Convention permits any method of service specifically authorized by the host country,20 but the plaintiff could not prove that such service was approved under Argentine law.21 C. ALTERNATIVE SERVICE OF PROCESS FRCP Rule 4(f)(3) permits service by other means not prohibited by international agreement if prior court approval is obtained. In Jimena v. UBS AG Bank, the court de*** Contributed by William Lawrence, partner at Frommer, Lawrence & Huag, LLP, New York, New York. 13. FED. R. CIV. P. 4(f)(3). 14. See Volkswagenwerk Aktiengesellschaft v. Schlunk, 486 U.S. 694, 699 (1988). 15. The Knit With v. Knitting Fever, Inc., No. 08-4221, 08-4775, 2010 WL 2788203, at *4 (E.D. Pa. July 13, 2010). 16. Id. at *7-8. 17. Marcus Food Co. v. DiPanfilo, No. 09-1261-EFM, 2010 U.S. Dist. LEXIS 107269, at *8 (D. Kan. Oct. 5, 2010). 18. Id. at *14-15. 19. GMA Accessories, Inc. v. Solnicki, No. 07 Civ. 3219, 2010 U.S. Dist. LEXIS 101256, at *6 (S.D.N.Y. Sept. 24, 2010). 20. Id. 21. Id. at *13. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 166 THE INTERNATIONAL LAWYER nied a plaintiff’s motion to serve a defendant through an attorney who represented him in another case.22 While Rule 4(f)(3) allows court-directed service if it is not prohibited by international (or other countries’) laws and is reasonably calculated to give notice, service on an attorney is generally inappropriate because of the adverse effect it may have on the attorney-client relationship.23 In Tracfone Wireless, Inc. v. Distelec Distribuciones Electronicas, S.A., the court considered a Honduran defendant’s motion to dismiss for improper service of process and plaintiff’s motion for alternative service under Rule 4(f)(3).24 Because Honduras is not a signatory to the Hague Convention, the court applied Honduran law. The court granted plaintiff’s request for service by FedEx on defendant and hand delivery on defendant’s U.S. attorneys because this method was not expressly prohibited by Honduran law.25 In Chanel Inc. v. Zhong Zhibing, the plaintiff sought to serve a Chinese defendant via e-mail because defendant’s address was unknown.26 Although China is a signatory to the Hague Convention, the court approved service by e-mail because it provided the “greatest likelihood” of reaching the defendant, which was an e-commerce business.27 In re TFT-LCD (Flat Panel) Antitrust Litigation highlights the fact-specific nature of international service of process. One plaintiff moved to authorize service on the attorneys for a Taiwanese defendant.28 The defendant argued that letters rogatory must be used because Taiwan was not a signatory to the Hague Convention.29 The court granted the motion because Rule 4(f)(3) service is not the exclusive means of service and letters rogatory were expensive and time-consuming. III. The Act of State Doctrine* The act of state doctrine is a prudential limitation on the exercise of judicial review in matters of foreign relations more appropriately left to other branches of government.30 U.S. courts avoid reviewing cases that require judging the validity of official acts of a foreign state performed in its own territory.31 22. Jimena v. UBS AG Bank, No. CV-F-07-367, 2010 U.S. Dist. LEXIS 57359, at *1-2 (E.D. Cal. June 10, 2010). 23. Id. at *12, *17-18. 24. Tracfone Wireless, Inc. v. Distelec Distribuciones Electronics, S.A. de DV, 268 F.R.D. 687, 688-89 (S.D. Fla. 2010). 25. Id. at 690. 26. Chanel, Inc. v. Zhong Zhibing, No. 2:09-cv-02835-cgc, 2010 WL 1009981, at *1-2 (W.D. Tenn. Mar. 17, 2010). 27. Id. at *3-4. 28. See generally In re TFT-LCD (Flat Panel) Antitrust Litig., 270 F.R.D. 535, 536-37 (N.D. Cal. 2010). 29. Id. at 5366. * Contributed by William Lawrence, partner at Frommer, Lawrence & Huag, LLP, New York, New York. 30. See Siderman de Blake v. Argentina, 965 F.2d 699, 707 (9th Cir. 1992). 31. See Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 401 (1964); Credit Suisse v. U.S. Dist. Court for the Cent. Dist. of Cal., 130 F.3d 1342, 1348 (9th Cir. 1997). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL LITIGATION A. RELATIONSHIP TO THE 167 FSIA In Samantar v. Yousuf, the Supreme Court held that immunity claims of foreign government officials are subject to common law, not FSIA.32 The Court reaffirmed that the act of state doctrine may be invoked with respect to acts taken by an individual government official and not only the acts of a foreign state per se.33 B. APPLICATION OF DOCTRINE In Wultz v. Islamic Republic of Iran, the court determined that a state’s knowledge that certain funds were destined for a terrorist group’s bank account was not an “act” of a foreign state.34 In United States v. Knowles, the Eleventh Circuit held that a U.S. court could not judge the legality of foreign authorities’ decision to extradite the defendant because that decision was an “official act of a foreign sovereign,” to which the act of state doctrine applied.35 C. COMMERCIAL ACTIVITY EXCEPTION Unlike another circuit,36 in Animal Science Products v. China National Metals, the court concluded that the act of state doctrine includes a “‘commercial activity’ exception” precluding its application to commercial, as opposed to sovereign, acts.37 The court in McKesson v. Islamic Republic of Iran38 similarly held the doctrine inapplicable to Iran’s purely commercial acts. Regarding Iran’s non-commercial acts, the court rejected the act of state doctrine because plaintiff’s expropriation claim fell under the Second Hickenlooper Amendment.39 D. DETERMINING WHETHER SOVEREIGN ACTS ARE IMPLICATED In In re Potash Antitrust Litigation, the court denied a motion to dismiss under the act of state doctrine because the record was unclear whether the court would ever be called upon to assess the validity of state action, or whether the “alleged conduct was compelled by an official act of the Republic of Belarus.”40 32. Samantar, 130 S. Ct. at 2292. 33. Id. at 2290. 34. See Wultz v. Islamic Republic of Iran, No. 08-cv-1460, 2010 U.S. Dist. LEXIS 111469, at *106, *109 (D.D.C. Oct. 20, 2010). 35. United States v. Knowles, 390 Fed. App’x 915, 928 (11th Cir. 2010). 36. See Honduras Aircraft Registry, Ltd. v. Honduras, 129 F.3d 543, 550 (11th Cir. 1997). 37. Animal Sci. Prods., Inc. v. China Nat’l Metals & Minerals Import & Export Corp., 702 F. Supp. 2d 320, 420-21 (D.N.J. 2010). 38. McKesson Corp. v. Islamic Republic of Iran, No. 82-0220, 2009 U.S. Dist. LEXIS 109368, at *17-18 (D.D.C. Nov. 20, 2009). 39. See 22 U.S.C. § 2370(e)(2) (2011). 40. In re Potash Antitrust Litigation, 686 F. Supp. 2d 816, 825 (N.D. Ill. 2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 168 E. THE INTERNATIONAL LAWYER VIEWS OF THE UNITED STATES GOVERNMENT In In re Refined Petroleum Products Antitrust Litigation, the district court dismissed plaintiffs’ claim that defendant oil companies violated the Sherman Antitrust Act by allegedly conspiring with Saudi Arabia, Venezuela, Russia, and others to fix prices through limits on their production of crude oil.41 On appeal now pending, the Fifth Circuit requested the United States’ views on whether the act of state and political question doctrines apply. The Government strongly endorsed dismissal on both grounds.42 IV. International Discovery* A. OBTAINING U.S. DISCOVERY FOR USE IN FOREIGN PROCEEDINGS Several court decisions analyzed the factors set out in 28 U.S.C. §1782(a) and the Supreme Court in Intel Corp. v. Advanced Micro determined whether to exercise discretion and allow discovery pursuant to Section 1782(a).43 In Ecuadorian Plaintiffs v. Chevron Corp., the Fifth Circuit noted that while work product protection was waived in this case, even when discovery is permissible under Section 1782(a), a party may not seek information protected by “privileges recognized by foreign law.”44 But, when a motion is tardy under FRCP 45, work product and attorney client privileged communications may be discoverable. Additionally, journalist privilege can be overcome by demonstrating “likely relevance to a significant issue in the case” and that such evidence was “not reasonably obtainable from other available sources.”45 In In re Winning (HK) Shipping Co., the court considered whether private arbitral bodies fall within the scope of tribunals to which Section 1782(a) applies, holding that in this case it was applicable because the arbitral tribunal’s decision would be subject to judicial review in England pursuant to the Arbitration Act of 1996.46 Recently, some courts have demonstrated an increased willingness to apply Section 1782 where the evidence produced will be used in arbitration under a bilateral investment treaty (“BIT”).47 41. In re Refined Petroleum Prods. Antitrust Litig., 649 F. Supp. 2d 572, 576-77, 598 (S.D. Tex. 2009). 42. Spectrum Stores Inc. v. CITGO Petroleum Corp., — F.3d —, 2011 WL 386871, at *n.11 (5th Cir. 2011). * Contributed by Howard S. Zelbo, Partner at Cleary, Gottlieb, Steen & Hamilton LLP in New York, New York, with assistance from Diana C. Miller and Heide Motaghi Iravani, associates at the same firm. 43. Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 243 (2004). 44. Ecuadorian Plaintiffs v. Chevron Corp., 619 F.3d 373, 377 (5th Cir. 2010). 45. See In re Chevron Corp., 709 F. Supp. 2d 283, 295 (S.D.N.Y. 2010). 46. In re Winning (HK) Shipping Co., No. 09-22659, 2010 U.S. Dist. LEXIS 54290, at *27-28 (S.D. Fla. Apr. 30, 2010). 47. In re Chevron Corp., 709 F. Supp. 2d at 291; In re Veiga, No. 10-370, 2010 U.S. Dist. LEXIS 111468, at *33 (D.D.C. Oct. 20, 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL LITIGATION B. OBTAINING DISCOVERY FROM ABROAD FOR USE IN 169 U.S. PROCEEDINGS In the case of In re Air Cargo Shipping Services Antitrust Litigation,48 Societe Air France withheld documents based on a French blocking statute allegedly requiring plaintiffs to seek the documents under the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters (“Hague Convention”).49 Applying the balancing test set forth in Société Nationale Industrielle Aérospatiale v. U.S. District Court for Southern District of Iowa,50 the court granted the plaintiffs’ request to compel production, holding that resort to the Hague Convention would not be “effective” or “efficient” under the circumstances.51 The court also held that the U.S. public policy of enforcing antitrust laws outweighed interests of comity.52 Addressing procedural requirements for Letters of Request under the Hague Convention, the court in Pronova BioPharma Norge AS v. Teva Pharmaceuticals USA, Inc. rejected Pronova’s argument that Letters of Request were “inappropriate” because they sought privileged information.53 The court reasoned that, if that was the case, “the requests will presumably be narrowed by the appropriate judicial authorities in those countries.”54 V. Extraterritorial Application of U.S. Law* In determining whether to apply U.S. law extraterritorially, courts follow the principles articulated in the Restatement (Third) of Foreign Relations.55 Last year, U.S. courts applied these principles widely, considering extraterritoriality in disputes involving securities law, civil RICO claims, and criminal statutes. A. SECURITIES LAW In Morrison v. National Australia Bank Ltd., the Supreme Court held that, absent a clear indication that a statute is intended to apply extraterritorially, it has no extraterritorial reach.56 The Court considered whether §10(b) of the Securities and Exchange Act provides a cause of action to foreign plaintiffs suing foreign and American defendants in connection with securities traded on foreign exchanges.57 The district court had dismissed the complaint for lack of subject matter jurisdiction.58 The Second Circuit affirmed, noting that the acts performed in the United States did not constitute the “heart of the al48. In re Air Cargo Shipping Servs. Antitrust Litig., No. 1775, 2010 U.S. Dist. LEXIS 30598, at *52-53 (E.D.N.Y. Mar. 29, 2010). 49. See generally Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters, Oct. 7, 1972, 23 U.S.T. 2555. 50. 482 U.S. 522, 546 (1987). 51. In re Air Cargo Shipping Servs. Antitrust Litig., 2010 U.S. Dist. LEXIS 30598 at *57-58. 52. Id. at *60-62. See also In re Air Cargo Shipping Servs. Antitrust Litig., No. 1775, 2010 U.S. Dist. LEXIS 75974, at *41, *45 (E.D.N.Y. July 23, 2010) (compelling discovery under “alternative means” test). 53. Pronova Biopharma Norge AS v. Teva Pharms. USA, Inc., 708 F. Supp. 2d 450, 453 (D. Del. 2010). 54. Id. * Contributed by Karen E. Woody, attorney at Cadwalader, Wickersham & Taft LLP. 55. RESTATEMENT (THIRD) OF FOREIGN RELATIONS LAW OF U.S. § 402 (1987). 56. Morrison v. Nat’l Australia Bank Ltd., 130 S. Ct. 2869, 2888 (2010). 57. Id. at 2875. 58. Id. at 2876. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 170 THE INTERNATIONAL LAWYER leged fraud.”59 The Supreme Court disagreed, noting that the court had jurisdiction to hear the case, but affirmed the dismissal for failure to state a claim upon which relief could be granted because there was no affirmative indication that §10(b) applied extraterritorially.60 B. CIVIL RICO The Second Circuit held that the Racketeer Influenced and Corrupt Organization Act (“RICO”) did not apply extraterritorially.61 The district court dismissed for lack of subject matter jurisdiction because the principal events underlying the claim occurred outside the United States.62 The Second Circuit affirmed because the statute gave no clear indication of extraterritorial application.63 C. CRIMINAL STATUTES In United States v. Leija-Sanchez, defendant moved to dismiss a charge under 18 U.S.C. § 1959, which prohibits violent crime in aid of a racketeering enterprise, arguing that the statute did not apply extraterritorially.64 Leija-Sanchez was accused of arranging the murder of a Mexican citizen in Mexico; the assassins were also Mexican citizens. The Seventh Circuit held that a section 1959 offense includes “multiple acts by which a crime such as murder facilitates the criminal enterprise,” reasoning that the statute applied because Leija-Sanchez was in the United States when he planned the murder and because its purpose was to reduce competition in a crime syndicate based in the United States.65 In United States v. Frank, the circuit court affirmed the defendant’s conviction under 18 U.S.C. § 2251A, prohibiting the purchase of a minor with intent to engage in sexually explicit conduct and produce any visual depiction of such conduct.66 The Eleventh Circuit held that section 2251A applied extraterritorially because the statute included language stating that, in the course of the prohibited conduct, the defendant or minor “travel in . . . interstate or foreign commerce.”67 VI. Enforcement of Foreign Arbitral Awards and Judgments* In U.S. courts, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards68 governs the recognition and enforcement of foreign arbitral awards 59. Id. 60. Id. at 2888. 61. Norex Petroleum Ltd. v. Access Indus., Inc., 622 F.3d 148, 152 (2d Cir. 2010). 62. Id. at 150. 63. Id. at 152. 64. United States v. Leija-Sanchez, 602 F.3d 797, 798 (7th Cir. 2010). 65. Id. at 800. 66. United States v. Frank, 599 F.3d 1221, 1229 (11th Cir. 2010). 67. Id. at 1230. * Contributed by Neale H. Bergman, Attorney-Adviser, Office of the Legal Adviser, U.S. Department of State. The views expressed herein are solely those of the author and do not necessarily reflect those of the U.S. Department of State or the U.S. Government. 68. U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38 [hereinafter New York Convention]. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL LITIGATION 171 and is implemented in U.S. law through Chapter Two of the Federal Arbitration Act (“FAA”).69 The New York Convention applies to awards “made in the territory” of a State other than the enforcing State and to awards “not considered as domestic awards” in the enforcing State.70 State law, however, governs the recognition and enforcement of foreign court judgments. Many states have adopted the Uniform Foreign Money-Judgments Recognition Act, which is based upon the comity principles expressed in Hilton v. Guyot.71 Other state courts generally apply the Hilton principles as a matter of common law. A. RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS In Hall Street Associates, L.L.C. v. Mattel, Inc., the Supreme Court held that sections 10 and 11 “provide exclusive regimes for the review provided by the [FAA].”72 Subsequently, several cases have addressed whether manifest disregard of the law remains a viable ground for vacatur under the FAA.73 In Stolt-Nielsen S.A. et al. v. AnimalFeeds International Corp., the Supreme Court vacated an arbitral award permitting class arbitration where the arbitration clause was silent on that issue because the arbitral panel “imposed its own policy choice and thus exceeded its powers.”74 Because the parties had stipulated that their arbitration clause was silent on class arbitration, the panel was required “to identify the rule of law that governs in that situation.”75 The panel failed to do so, instead reaching a conclusion “fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.”76 In Republic of Argentina v. BG Group PLC, the court rejected Argentina’s petition to vacate or modify an approximately $185 million arbitral award issued in Washington, D.C.77 Argentina claimed that the court had jurisdiction because the New York Convention (“Convention”) applied, while arguing the contrary with respect to a cross-motion for a pre-judgment bond issued pursuant to article VI of that Convention.78 Referring to section 202 of the FAA, the court found it had jurisdiction because, given that the Con69. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. §§ 201-08 (2011). 70. New York Convention, supra note 68, art. I(1). See also Inter-American Convention on International Commercial Arbitration, June 16, 1976 (Panama Convention), available at http://www.sice.oas.org/dispute/ comarb/iacac/iacac2e.asp (governing the recognition and enforcement of awards among member States of the Organization of American States (OAS) who are party and implemented in U.S. law through Chapter 3 of the FAA); 9 U.S.C §§ 301-07 (2011). Unless otherwise agreed, the Panama Convention applies to the exclusion of the New York Convention “[i]f a majority of the parties to the arbitration agreement are citizens of a State or States that have ratified or acceded to the [Panama Convention] and are members States of the [OAS.]” See 9 U.S.C. § 305. 71. See generally Hilton v. Guyot, 159 U.S. 113 (1895). 72. See generally Hall St. Assocs. v. Mattel, Inc., 552 U.S. 576, 590 (2008). 73. See Stolt-NielsenNielson S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758, 1766-76 (2010); RamosSantiago v. United Parcel Serv., 524 F.3d 120, 124-25 (1st Cir. 2008); Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 350 (5th Cir. 2009); Comedy Club, Inc. v. Improv West Assocs., 553 F.3d 1277, 1281-83 (9th Cir. 2009). 74. Id. at 1766-67, 1770, 1777. 75. Id. at 1768. 76. Id. at 1767-68, 1775. 77. Argentina v. BG Group PLC, 715 F. Supp. 2d 108, 114, 118, 126 (D.D.C. 2010). 78. Id. at 116-17. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 172 THE INTERNATIONAL LAWYER vention could cover arbitral awards involving two domestic parties under certain circumstances: it would be nonsensical . . . to conclude that the Award–which was issued in a dispute involving two foreign parties, a foreign treaty, and a foreign investment–falls outside the reach of a treaty that was ratified for the purpose of recognizing and enforcing foreign arbitral awards.79 Ultimately, the court rejected Argentina’s arguments on the merits, refusing to vacate or modify the award.80 B. RECOGNITION AND ENFORCEMENT OF FOREIGN COURT JUDGMENTS In Servaas Incorporated v. Republic of Iraq, the court denied defendants’ motion to dismiss for lack of personal and subject matter jurisdiction and for failure to state a claim in a recognition proceeding of a judgment issued by the Paris Commercial Court against the Iraqi Ministry of Industry.81 Applying the “commercial activities” exception of the FSIA, the court found that it had jurisdiction over both Iraq and its “alter ego,” the Ministry of Industry.82 The court then noted that article 53 of New York’s Uniform Foreign Country Money-Judgments Recognition Act applies to “any foreign country judgment which is final, conclusive and enforceable where rendered even [if] an appeal . . . is pending or it is subject to appeal.”83 Noting that the French judgment was both final and enforceable, the court stated that a foreign country judgment: is considered “conclusive between the parties to the extent that it grants or denies recovery of a sum of money” . . . unless (1) “the judgment was rendered under a system which does not provide impartial tribunals or procedures compatible with the requirements of due process of law;” or (2) “the foreign court did not have personal jurisdiction over the defendant.”84 Finding that neither exception applied, the court held that the plaintiff stated a claim under article 53.85 On enforceability, the court rejected Iraq’s argument that its assets in the United States were immune because Executive Order 13,364 only bars “judgments with respect to certain delineated Iraqi assets in the United States.”86 In Continental Transfert Technique Ltd. v. Federal Government of Nigeria, the court denied Nigeria’s motions to dismiss actions to enforce a $252 million arbitral award issued in the United Kingdom under Nigerian law and an English court order enforcing that award.87 The court denied Nigeria’s motion to dismiss with respect to enforcement of the arbitral award under the FAA and New York Convention.88 The court also rejected Nigeria’s 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. Id. at 119-20. Id. at 120-25. Servaas Inc. v. Republic of Iraq, 686 F. Supp. 2d 346, 348-50 (S.D.N.Y. 2010). Id. at 354-58. Id. at 359 (quoting N.Y. C.P.L.R. 5302 (MCKINNEY 2005)). Id. (quoting N.Y. C.P.L.R. 5303-04 (MCKINNEY 2005)) (citation omitted). Id. Id. at 359-60. Cont’l Transfert Technique Ltd. v. Nigeria, 697 F. Supp. 2d 46, 52, 65 (D.D.C. 2010). See id. at 55-58, 61-62. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL LITIGATION 173 motion with respect to enforcement of the English court’s order under the Uniform Foreign Money-Judgments Recognition Act (“D.C. Money-Judgments Recognition Act”).89 Finding that the English court order was a judgment as defined by the statute,90 the court rejected Nigeria’s claim that the English court order was “obtained by fraud” because only extrinsic fraud constitutes a ground for non-enforcement.91 Finally, the court rejected Nigeria’s argument that enforcement should be dismissed or stayed because it was seeking to set aside the English court order.92 The D.C. Money-Judgments Recognition Act does not authorize dismissal of proceedings if an appeal is pending, or the defendant is entitled to appeal, and Nigeria was not entitled to a stay in part because it failed to demonstrate that any “attack” on that order was “likely to be successful.”93 VII. Forum Non Conveniens* A court held that “under the common law doctrine of forum non conveniens, a court with proper jurisdiction and venue over a matter may refrain from hearing the case if another significantly more appropriate forum exists.”94 The party seeking dismissal for forum non conveniens must show that: (1) “an adequate alternative forum exists; and (2) . . . the balance of private and public interest factors favors dismissal.”95 A. ADEQUACY OF REMEDIES IN THE ALTERNATE FORUM An alternative forum is “adequate” if the “remedy provided by the alternative forum is [not] so clearly inadequate or unsatisfactory that it is no remedy at all.”96 The remedy need not be judicial. In Steward International Enhanced Index Fund v. Carr, shareholders sued the directors of Cadbury, a U.K. corporation, in connection with its acquisition by Kraft Foods.97 Plaintiffs argued that the proceedings were administrative and did not offer the opportunity to litigate.98 The court disagreed, stating that “the proper inquiry should be premised upon the fairness of the procedures and potential remedies that the forum can provide.”99 In Tang v. Synutra International, Chinese citizens sued a U.S. corporation in Maryland in the wake of the milk contamination crisis in China.100 The Chinese government had organized a compensation fund independent of the Chinese judicial system, which refused 89. See id. at 54-55, 62, 65. 90. Id. at 62-63. 91. Id. at 62-64. 92. Id. at 65. 93. Id. * Contributed by Phillip B. Dye, Jr. and Russell T. Gips of Vinson & Elkins LLP in Houston, Texas. 94. Trabucco v. Intesa Sanpaolo, S.P.A., 695 F. Supp. 2d 98, 105 (S.D.N.Y. 2010). 95. Cook v. Champion Shipping AS, No. 2:09-CV-03605, 2010 WL 3069346, at *2 (E.D. Cal. Aug. 4, 2010). The relevant private and public interest factors to be balanced are set forth in Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947). 96. Piper Aircraft Co. v. Reyno, 454 U.S. 235, 254 (1981). 97. Steward Int’l Enhanced Index Fund v. Carr, No. 09-CV-5006, 2010 WL 336276, at *1, *3 (D.N.J. Jan. 22, 2010). 98. Id. at *4. 99. Id. at *5. 100. Tang v. Synutra Int’l, Inc., No. 09-0088, 2010 WL 1375373, at *1 (D. Md. Mar. 29, 2010). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 174 THE INTERNATIONAL LAWYER to address the victims’ claims.101 The court rejected the plaintiffs’ argument that the Chinese courts’ inaction rendered them unavailable, observing that “another remedy is undisputedly available, namely, the compensation program.”102 B. RE-LITIGATING FORUM NON CONVENIENS In Can v. Goodrich Pump & Engine Control Systems, Incorporated, Turkish citizens filed suit in federal court in Connecticut, asserting claims against U.S. manufacturers stemming from a helicopter crash in Turkey.103 An Indiana state court had previously dismissed an almost identical suit on forum non conveniens grounds. The court held that collateral estoppel prohibited the plaintiffs from filing again in the United States, reasoning that the issue “was not whether the action should be tried in Indiana or Connecticut . . . but whether the action should be tried in the United States or Turkey.”104 In contrast, in Meijer v. Qwest Communications, a federal court in Colorado found that a previous forum non conveniens dismissal did not preclude the plaintiffs from refiling in Colorado.105 The New Jersey district court and Third Circuit decisions “analyzed most of the relevant factors by comparing the United States generally and the Netherlands” instead of New Jersey and the Netherlands.106 Thus, the Third Circuit stated that this decision did “not necessarily mean that this action may not be maintainable in another federal district.”107 The Colorado court therefore conducted its own analysis from a Colorado perspective and eventually dismissed the claims based on forum non conveniens. C. PRIVATE INTEREST FACTORS In weighing the private interest factors, courts consider ease of access to proof in the competing fora. In Rodriguez v. Samsung Electronics Company, the court noted it could not “evaluate the importance of [the] potential witnesses’ testimony” where the defendant had merely listed the witnesses’ names.108 In contrast, in Marnavi Splendor GMBH & Co. KG v. Alston Power Conversion, Incorporated, the defendants provided a descriptive list of potential witnesses and the court found that the location of the defendants’ witnesses weighed in favor of their choice of forum.109 101. Id. 102. Id. at *9-10. 103. Can v. Goodrich Pump & Engine Control Sys., Inc., 711 F. Supp. 2d 241, 245 (D. Conn. 2010). 104. Id. at 251. 105. Meijer v. Qwest Commc’ns Int’l, Inc., No. 09-cv-00162-REB-KLM, 2010 WL 1348668, at *3 (D. Colo. Mar. 31, 2010). 106. Id. 107. Id. (quoting Windt v. Qwest Commc’ns Int’l, Inc., 529 F.3d 183, 192 (3d Cir. 2008)). 108. Rodriguez v. Samsung Elecs. Co., Ltd., No. 09-11028-NMG, 2010 WL 3238839, at *5 (D. Mass. Aug. 16, 2010); see also Rogers v. Petróleo Brasileiro, S.A., Nos. 09 Civ. 08227 (PGG), 09 Civ. 08228 (PGG), 2010 WL 3768158, at *12 (S.D.N.Y. Sept. 27, 2010) (denying motion and observing that no specific witnesses in Brazil were identified). 109. Marnavi Splendor GMBH & Co. KG v. Alston Power Conversion, Inc., 706 F. Supp. 2d 749, 757-58 (S.D. Tex. 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL LITIGATION 175 VIII. Parallel Proceedings* Parallel proceedings exist where “substantially the same parties are litigating substantially the same issues simultaneously in two fora.”110 U.S. courts confronted with motions to stay or dismiss parallel proceedings and motions for anti-suit injunctions invoke principles of international comity and abstention to resolve them. A. THE COLORADO RIVER ABSTENTION DOCTRINE In cases involving foreign proceedings, most courts have extended the factors set out in Colorado River Water Conservation District v. United States to determine whether to abstain from hearing a case in favor of a pending foreign suit.111 These factors include the relative inconvenience of the two fora, “the need to avoid piecemeal litigation,” the order in which the proceedings were filed, and whether domestic or foreign law provides the rule of decision.112 Additionally, the court must determine whether “exceptional circumstances” justify surrender of jurisdiction.113 In Kitaru Innovations Inc. v. Chandaria, a Barbados company sued a British patent holder, seeking a declaratory judgment that it had not infringed a patent.114 The defendants moved to dismiss based on parallel proceedings in the Superior Court of Justice for Ontario, Canada. Although both cases involved the same parties and similar issues, the district court denied the motion to dismiss because the first-filed Canadian action had not “progressed significantly since that filing.”115 The court also rejected the defendants’ argument that having to litigate in two fora, where the locus of core facts was in Canada, constituted “exceptional circumstances” justifying abstention.116 In Farhang v. Indian Institute of Technology Kharagpurr, the court held that the Colorado River factors need not be considered if there is substantial doubt as to whether the foreign proceeding will resolve the federal action.117 One defendant moved to stay the federal case pending resolution of proceedings in the High Court at Calcutta, India, under the international abstention doctrine.118 The court denied the motion in part because of doubt that the Indian proceedings would resolve all the issues in the case. * Contributed by Lorraine de Germiny, Associate, King & Spalding LLP. 110. Groeneveld Transp. Efficiency, Inc. v. Lubecore Int’l, Inc., No. 1:10 CV 702, 2010 WL 2991504, at *3 (N.D. Ohio July 28, 2010) (quoting Finova Capital Corp. v. Ryan Helicopters U.S.A., 180 F.3d 896, 898 (7th Cir. 1999)). 111. Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 801 (1976). 112. Groeneveld Transp. Efficiency, Inc., 2010 WL 2991504 at *3; Brake Parts, Inc. v. Lewis, Nos. 09-132KSF, 10-212-KSF, 2010 WL 3470198, at *3-4 (E.D. Ky. Aug. 31, 2010); Farhang v. Indian Inst. of Tech., Kharagpur, No. C-08-02658 RMW, 2010 WL 2228936, at *2 (N.D. Cal. June 1, 2010). 113. Kitaru Innovations Inc. v. Chandaria, 698 F. Supp. 2d 386, 390 (S.D.N.Y. 2010) (quoting Royal & Sun Alliance Ins. Co. of Can. v. Century Int’l Arms, Inc., 466 F.3d 88, 93 (2d Cir. 2006)). 114. Id. at 386. 115. Id. at 391. 116. Id. See also Brake Parts, Inc., 2010 WL 3470198 at *5. 117. Farhang, 2010 WL 2228936 at *2-3. 118. Id. at *1. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 176 THE INTERNATIONAL LAWYER B. PARALLEL PROCEEDINGS AND INTERNATIONAL COMITY International comity is “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience and to the rights of its own citizens or of other persons who are under the protection of its laws.”119 In ITL International, Inc. v. Walton & Post, Inc., the court dismissed the case on grounds of international comity, fairness, and efficiency, noting that in the Eleventh Circuit these three factors determine whether a court should abstain from exercising jurisdiction.120 The court relied on the fact that the Dominican Republic proceedings had been litigated for several years and that the Dominican courts had already rendered a final judgment.121 In Farhang, the defendant based its motion to stay pending resolution of the Indian legal proceedings on grounds of international comity.122 The court noted that principles of international comity apply when there is a “true conflict between domestic and foreign law” and that a possible inconsistency between future judgments of a domestic court and a foreign court is not a “true conflict.”123 Because the Indian court had not yet rendered factual findings, there was no conflict; the court denied the motion.124 Dedon GMBH v. Janus et Cie. involved a motion to stay proceedings on the issue of arbitrability in favor of an ICC arbitration in London.125 Raising the question of international comity and noting that “neither party ha[d] seriously briefed the issue,”126 the court stated that it had an “undoubted responsibility” to rule on the question of arbitrability and denied the motion to stay.127 C. PARALLEL PROCEEDINGS AND ANTI-SUIT INJUNCTIONS A court may issue an anti-suit injunction barring parties from participating in foreign litigation only if the parties are the same in both proceedings and resolution of the domestic case is dispositive of the foreign action.128 In SEC v. Pension Fund of America, the Eleventh Circuit held that the anti-suit injunction was invalid because neither condition was met.129 Even when both conditions are met, courts will apply one of two standards to determine whether to issue an anti-suit injunction. Under the conservative approach, the movant 119. ITL Int’l, Inc. v. Walton & Post, Inc., No. 10-22096-CV, 2010 WL 3853272, at *2 (S.D. Fla. Sept. 29, 2010) (citations omitted). 120. Id. at *3-4. 121. Id. 122. Farhang, 2010 WL 2228936 at *1. 123. Id. (citations omitted). 124. Id. 125. Dedon GMBH v. Janus et Cie, No. 10 Civ. 04541 (CM), 2010 WL 4227309, at *8-9 (S.D.N.Y. Oct. 19, 2010). 126. Id. at *10. 127. Id. 128. SEC v. Pension Fund of Am., L.C., No. 10-10464, 2010 WL 3582429, at *3 (11th Cir. Sept. 15, 2010) (quoting Canon Latin Am., Inc. v. Lantech (CR), S.A., 508 F.3d 597, 601 (11th Cir. 2007)); Abbott Labs. v. Qiagen Gaithersburg, Inc., No. 10 CV 712, 2010 WL 1539952, at *4 (N.D. Ill. Apr. 15, 2010). 129. Pension Fund of Am., L.C., 2010 WL 3582429 at *4; Abbott Labs., 2010 WL 1539952 at *4-5. See also Int’l Litigation, 44 INT’L LAW. 167, 211 (2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTERNATIONAL LITIGATION 177 must demonstrate (1) that the foreign action would prevent U.S. jurisdiction or threaten a vital U.S. policy, and (2) that the domestic interests outweigh international comity concerns.130 Under the liberal approach, courts will enjoin foreign litigation if it will (1) frustrate a policy of the enjoining forum, (2) be “vexatious or oppressive,” (3) threaten the domestic court’s in rem or quasi in rem jurisdiction, or (4) “prejudice other equitable considerations.”131 If any of these factors is present and if “the impact on comity is tolerable,” the court may grant an anti-suit injunction.132 130. Cont’l Cas. Co. v. Axa Global Risks (UK) Ltd., No. 4:09-CV-00335-FJG, 2010 WL 1268038, at *3 (W.D. Mo. Apr. 2, 2010). 131. Teck Metals Ltd. v. Certain Underwriters at Lloyd’s, London, No. CV-05-411-LRS, 2009 WL 4716037, at *3 (E.D. Wash. Dec. 8, 2009). 132. Id. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Corporate Social Responsibility SARAH A. ALTSCHULLER, AMY K. LEHR, AND ANDREW J. ORSMOND* I. International Law and Policy Developments A. SPECIAL REPRESENTATIVE HUMAN RIGHTS AND OF THE U.N. SECRETARY GENERAL ON THE ISSUE OF TRANSNATIONAL CORPORATIONS John Ruggie, Special Representative of the U.N. Secretary-General (“UN SRSG”) on the issue of human rights and transnational corporations, continued his work in 2010. In November, he released a draft of his final report, the Guiding Principles for the Implementation of the United Nations “Protect, Respect, and Remedy” Framework, for public comment.1 The Guiding Principles represent the culmination of the UN SRSG’s work, which will conclude when Mr. Ruggie delivers his final report to the U.N. Human Rights Council in June 2011.2 The Guiding Principles are organized around the three-pillar policy framework first introduced in the UN SRSG’s April 2008 report.3 The framework consists of three core principles: (i) the state duty to protect against human rights abuses; (ii) the corporate responsibility to respect human rights; and (iii) the need for effective access to remedies. The draft Guiding Principles emphasize that companies have a responsibility to respect human rights: this means that companies must act affirmatively to avoid infringing on the human rights of others. Companies must also address any adverse human rights impacts associated with their operations.4 The Guiding Principles suggest that companies integrate * Sarah Altschuller, Amy Lehr, and Andrew Orsmond are associates in the Corporate Social Responsibility Practice Group of Foley Hoag LLP. Ms. Altschuller is Co-Chair of the Corporate Social Responsibility Committee of the ABA’s Section of International Law and Practice. Until September 2008, Ms. Lehr worked as a legal advisor to the Special Representative to the U.N. Secretary-General on the issue of human rights and transnational corporations. 1. Special Representative of the Secretary-General, Draft, Guiding Principles for the Implementation of the United Nations’ ‘Protect, Respect, and Remedy’ Framework, U.N. Doc. A/HRC (Nov. 22, 2010), available at http:/ /www.reports-and-materials.org/Ruggie-UN-draft-Guiding-Principles-22-Nov-2010.pdf [hereinafter UN SRSG Guiding Principles]. 2. In June 2008, the U.N. Human Rights Council renewed the UN SRSG’s mandate for three additional years. His first mandate ran from June 2005 to June 2008. 3. Special Representative of the Secretary-General, Protect, Respect and Remedy: a Framework for Business and Human Rights, U.N. Doc. A/HRC/8/5 (Apr. 7, 2008), available at http://www.reports-and-materials.org/ Ruggie-report-7-Apr-2008.pdf. 4. UN SRSG Guiding Principles, supra note 1, p. 12. 179 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 180 THE INTERNATIONAL LAWYER human rights into their management systems by adopting policy commitments to human rights and by conducting due diligence intended to identify, prevent, mitigate, and remediate the actual and potential human rights impacts of their operations.5 The Guiding Principles also state that companies should engage in meaningful consultations with external stakeholders and should report on the impacts of their activities.6 The UN SRSG’s draft Guiding Principles stress that the corporate responsibility to respect human rights applies across a company’s business activities and through its relationships with third parties, such as suppliers, business partners, or host governments. It also applies to all enterprises, regardless of size or ownership structure.7 In April 2010, the UN SRSG submitted an interim report to the UNHRC entitled Business and Human Rights: Further Steps toward the Operationalization of the “Protect, Respect, and Remedy” Framework.8 The report provided an update on work under the second mandate and noted that three-pillar “Protect, Respect, and Remedy” framework continues to gain support. Mr. Ruggie noted that “several countries have referenced the framework in conducting their own policy assessments” and that “[s]everal global corporations have already aligned their due diligence processes with the framework.”9 The April 2010 report also noted that the UN SRSG has consulted with the Organization for Economic Cooperation and Development (“OECD”) and the International Finance Corporation (“IFC”). The OECD is currently revising its Guidelines for Multinational Enterprises, and the IFC is revising its Performance Standards. B. ORGANIZATION FOR FOR ECONOMIC COOPERATION AND DEVELOPMENT GUIDELINES MULTINATIONAL ENTERPRISES In April 2010, the forty-two governments that adhere to the OECD Guidelines for Multinational Enterprises agreed on the terms of reference for an update to the guidelines. According to the Terms of Reference, “the update aims to ensure the continued role of the Guidelines as a leading international instrument for the promotion of responsible business conduct.”10 The Terms of Reference specifically call for a review and possible revision of the Guidelines’ provisions on supply chains, human rights, disclosure, labor and industrial relations, anti-corruption, environment, consumer interests, and taxation. With regard to human rights, the Terms of Reference explicitly note the need to develop more elaborate guidance on human rights, including, “if deemed appropriate,” a separate chapter drawing on the work of the UN SRSG.11 The Terms of Reference also suggest that “the update could also explore the merits of making due diligence one of the 5. Id. at 14-15. 6. Id. at 16. 7. Id. at 12-13. 8. Special Representative of the Secretary-General, Business and Human Rights: Further Steps Toward the Operationalization of the “Protect, Respect and Remedy” Framework, U.N. Doc. A/HRC/14/27 (Apr. 9, 2010), available at http://www.reports-and-materials.org/Ruggie-report-2010.pdf. 9. Id. ¶¶ 13-14. 10. Organization for Economic Co-operation and Development, Terms of Reference for an Update of the OECD Guidelines for Multinational Enterprises (May 4, 2010), available at http://www.oecd.org/dataoecd/61/ 41/45124171.pdf. 11. Id. at 3-4. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CORPORATE SOCIAL RESPONSIBILITY 181 general operational principles.”12 With regard to the environment, the Terms of Reference state that given “growing concerns over climate change and increased attention given to green growth, eco-innovation, bio-diversity and sustainability issues,” parties drafting the update should consider whether there is a need to update or revise the existing environmental guidelines.13 The update of the OECD Guidelines officially began at the June 2010 Annual Meeting of the National Contact Points (“NCPs”) and should be completed in 2011. Several major consultations have occurred as a part of the overall review process. In June, at the time of the Annual Meeting of the NCPs, the OECD organized a roundtable on corporate social responsibility. The roundtable brought together representatives from governments, companies, labor organizations, non-governmental organizations, and academia. In October, the UN SRSG consulted the forty-two adhering governments to discuss the role of the Guidelines in putting the “Protect, Respect, and Remedy” framework into operation. Finally, in December 2010, the OECD organized a special consultation between delegates of the forty-two adhering governments and a wide range of stakeholders to discuss human rights, employment, due diligence, supply chains, and procedural provisions, including those relating to the functioning of NCPs. C. EUROPEAN PARLIAMENT RESOLUTION IN ON CORPORATE SOCIAL RESPONSIBILITY INTERNATIONAL TRADE AGREEMENTS In November 2010, the European Parliament adopted a resolution on corporate social responsibility in international trade agreements. The resolution states that “in light of the key role played by corporations, their subsidiaries and their supply chains in international trade, that corporate social and environmental responsibility must become an integral part of the European Union’s trade agreements.”14 The resolution calls for CSR to be incorporated into the generalized system of preferences regulation “when it is next revised” and calls on the European Commission “to ensure that transnational corporations, whether or not they have their registered office in the European Union, whose subsidiaries or supply chains are located in countries participating in the GSP, and in particular in GSP+, are required to comply with their national and international legal obligations in the areas of human rights, labour standards, and environmental rules[.]”15 The resolution also proposes that “future trade agreements negotiated by the [European] Union should incorporate a chapter on sustainable development which includes a CSR clause, based, in part, on the 2010 update of the OECD Guidelines for Multinational Enterprises.”16 12. Id. at 4. 13. Id. at 5. 14. European Parliament resolution of 25 November 2010 on corporate social responsibility in international trade agreements (2009/2201(INI)), ¶ 7. 15. Id. ¶ 20. 16. Id. ¶ 25. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 182 D. THE INTERNATIONAL LAWYER ISO 26000 In November 2010, the International Organization for Standardization (“ISO”) released its guidance on social responsibility, ISO 26000.17 The guidance consists of voluntary guidelines. Unlike ISO 14001, ISO 26000 is not a certification standard. The guidance is intended for use by organizations of all types, in both public and private sectors. It covers labor, human rights, the environment, corruption, consumer concerns, and other issues pertinent to social responsibility. Ninety-nine ISO member countries, a wide range of stakeholder organizations, and individual experts participated in developing the guidance. ISO 26000 was developed to complement key U.N. declarations and conventions, including the core ILO Conventions. E. INTERNATIONAL CODE OF CONDUCT FOR PRIVATE SECURITY PROVIDERS In November 2010, fifty-eight private security companies gathered in Geneva, Switzerland, to sign an International Code of Conduct for Private Security Service Providers.18 The aim of the Code is to create a set of universally recognized standards for private companies engaged in providing security services. The Swiss Government sponsored this multi-stakeholder initiative, which it launched in 2009. In the Preamble to the Code, the signatories explicitly endorsed the principles set forth in the Montreux Document On Pertinent International Legal Obligations and Good Practices for States Related to Operations of Private Military and Security Companies and the UN SRSG’s “Respect, Protect, Remedy” framework. Getting this Code signed and published is a milestone achievement. Representatives of industry, civil society, and participating and supporting governments attended the signing ceremony. These representatives included Swiss Secretary of State, Peter Maurer; U.K. Ambassador, John Duncan; and U.S. Department of State Legal Advisor, Harold Hongju Koh. Mr. Koh highlighted the significance of the Code: “for by bringing together all of the key stakeholders—states, civil society organizations, relevant experts, clients, and the private security companies themselves—this initiative has the potential to address gaps in oversight and accountability left by traditional regimes.”19 Included in the Code are requirements that govern the vetting, training, and conduct of PSC personnel. Signatories also commit to implementing accessible incident reporting and grievance procedures aimed at preventing and/or enhancing the investigation of alleged abuses. The Code calls for the establishment, within eighteen months, of “objective and measurable standards for providing Security Services based upon [the] Code,”20 and further calls for the development of transparent and effective oversight and auditing mechanisms to which participants will be expected to submit. 17. ISO 26000:2010–Guidance on Social Responsibility, available at http://www.iso.org. 18. International Code of Conduct for Private Security Providers, available at http://www.news.admin.ch/ NSBSubscriber/message/attachments/21143.pdf [hereinafter International Code of Conduct]. 19. Nils Rosemann, Swiss Federal Department of Foreign Affairs, International Code of Conduct for Private Security Providers: A Multi-Stakeholder Initiative of the 21st Century? (Nov. 24, 2010), available at http://www.institutehrb.org/blogs/guest/international_code_of_conduct_for_private_security_providers. html. 20. International Code of Conduct, supra note 18, ¶ 7. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CORPORATE SOCIAL RESPONSIBILITY F. REVIEW AND UPDATE OF THE 183 IFC SUSTAINABILITY FRAMEWORK In late 2009, the IFC launched a review and update of its sustainability framework. This update includes the Sustainability Policy, the Performance Standards on Social and Environmental Sustainability, and the Policy on Disclosure of Information. The IFC applies the Performance Standards to manage social and environmental risks and impacts associated with IFC-financed projects. During 2010, the IFC engaged in formal and informal consultations with the communities directly affected by the projects that it funds. Revisions of the IFC sustainability framework should be completed in early 2011.21 After the IFC completes its sustainability framework review and update, especially the update of the IFC Performance Standards, the Equator Principles Association is expected to begin a review and update of the Equator Principles in late 2011. The Equator Principles are a voluntary set of standards for determining, assessing, and managing social and environmental risk in project financing. They are based, in part, on the IFC Performance Standards. Financial institutions in nearly thirty countries have adopted the Equator Principles.22 II. Domestic Law and Policy Developments A. U.S. FEDERAL LEGISLATION 1. Conflict Minerals and the Dodd-Frank Wall Street Reform and Consumer Protection Act President Obama signed Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010 (Dodd-Frank).23 Dodd-Frank requires publicly traded companies that utilize certain “conflict minerals” to report the due diligence steps they have taken to demonstrate that their products are not fueling conflict in the Democratic Republic of Congo (“DRC”). “Conflict minerals” include tantalum (coltan), cassiterite (tin), wolramite (tungsten) and gold. The sale of conflict minerals, it is believed, helps armed groups fund the purchase of weapons and allows them to continue hostilities in the DRC. The minerals in question are commonly used in a variety of commercial products. Thus, Dodd-Frank affects a broad spectrum of industries, including mining, automotive, aerospace, and jewelry. The aim of the legislation is not to ban the use of these minerals just because they originate from the DRC. Instead, Section 1502 seeks to ensure that the minerals do not come from conflict areas of the DRC or otherwise help fund the conflict. Under Dodd-Frank, companies that use conflict minerals have a duty to produce an annual disclosure to the Securities and Exchange Commission (“SEC”) if the minerals are “necessary to the functionality or production of a product” manufactured by the company.24 The annual disclosure must state whether the conflict minerals originated in the 21. See generally, About the Review and Update, INT’L FIN. CORP., http://www.ifc.org/ifcext/policyreview. nsf/Content/AboutReview (last visited Jan. 26, 2011). 22. See generally, About the Equator Principles, EQUATOR PRINCIPLES, http://www.equator-principles.com/ abouttheeps.shtml (last visited Jan. 26, 2011). 23. Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 12 U.S.C. § 1502 (2010). 24. Id. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 184 THE INTERNATIONAL LAWYER DRC or an adjoining country (including Angola, Burundi, Central African Republic, Republic of Congo, Rwanda, Sudan, Tanzania, Uganda, and Zambia). If the minerals used by the company originate in the DRC or an adjoining country, the company must report on the due diligence measures that it took regarding the source and chain of custody of those minerals. Due diligence should include an audit by an independent professional audit company. Companies must also submit a description of any products manufactured by the company that are not “DRC conflict free.”25 Products are conflict free if they do not contain minerals that directly or indirectly finance or benefit armed groups in the DRC or an adjoining country. Products are considered to benefit such groups if they come from areas where armed groups physically control mines or force civilians to mine, transport, or sell conflict minerals; tax, extort, or control any part of trade routes for the minerals up to the point of export; or tax, extort, or control trading facilities, in whole or in part. Final implementing regulations for Section 1502 are expected to be issued no later than April 15, 2011. 2. Extractive Industry Transparency and the Dodd-Frank Wall Street Reform and Consumer Protection Act Section 1504 of Dodd-Frank contains broad-reaching transparency provisions requiring oil, gas, mining, and other extractive industry companies to report annually to the SEC on their payments to governments.26 Specifically, under Section 1504, companies that are securities issuers under U.S. law must report annually to the SEC on their payments to the U.S. and foreign governments. Their subsidiaries and controlled entities have the same duty. Companies must report on the type and total amount of payments made on a project basis. They must include taxes, royalties, fees, production entitlements, bonuses, and other material benefits, to the extent that the SEC determines that these are part of the commonly recognized revenue stream for extractive projects. Congress did not specify whether the annual report must be part of the company’s 10K or another form of reporting but instead left this decision to the SEC rule-making process. It is likely that the penalties related to fraudulent or deceptive reporting to the SEC will apply. The legislation is intended to reinforce the Extractive Industries Transparency Initiative, which is a multi-stakeholder initiative consisting of oil, gas, and mining companies; civil society; and governments. Under the Extractive Industries Transparency Initiative, many U.S. companies already report their payments to some, although not all, governments around the world. Dodd-Frank may require that companies report more detailed payment information than the Extractive Industries Transparency Initiative currently demands. These details will depend on the SEC’s interpretation of the legislation. Implementing regulations for Section 1502 are expected to be issued no later than April 15, 2011. 25. Id. 26. Id. § 1504. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CORPORATE SOCIAL RESPONSIBILITY 185 B. U.S. STATE LEGISLATION 1. The California Transparency in Supply Chains Act of 2010 On September 30, California Governor Arnold Schwarzenegger signed The California Transparency in Supply Chains Act of 2010 into law.27 The legislation will require companies to disclose their efforts to ensure that their supply chains are free from slavery and human trafficking. The legislation will go into effect on January 1, 2012. It applies to retail sellers and manufacturers doing business in California that have annual gross receipts exceeding one hundred million dollars. Once the legislation goes into effect, companies will be required to disclose what actions they are taking, if any, to evaluate, and address the risks of human trafficking and slavery in their product supply chains. Companies must also disclose their efforts to audit their suppliers’ compliance with company standards regarding trafficking and slavery. Companies must also develop and maintain accountability mechanisms for employees or contractors who fail to meet company standards regarding slavery and human trafficking. Companies are required to make these disclosures on their websites. If a company does not have a website, the information must be made available in writing within thirty days of a consumer request for the disclosure. The exclusive remedy for failure to comply with the law is an action brought by the Attorney General of California for injunctive relief. Initial estimates suggest that the legislation will impact approximately 3,200 companies.28 The intent of the legislation is to provide consumers with the information they need to make purchasing decisions free of slavery and human trafficking. C. U.S. LITIGATION–LITIGATION UNDER THE ALIEN TORT STATUTE 1. Kiobel v. Royal Dutch Petroleum In September 2010, the Second Circuit Court of Appeals held in Kiobel v. Royal Dutch Petroleum Co. that corporations cannot be properly sued under the Alien Tort Statute (“ATS”) for violations of customary international law.29 The case is one of a series of cases arising from claims that Royal Dutch Petroleum was complicit in human rights abuses against the Ogoni people in Nigeria. Three related cases (the “Wiwa cases”) settled on the eve of trial in June 2009 for a disclosed settlement of $15.5 million.30 In an opinion written by Judge Jose Cabranes, the Second Circuit concluded that: No corporation has ever been subject to any form of liability (whether civil, criminal, or otherwise) under the customary international law of human rights. Rather, sources of customary international law have, on several occasions, explicitly rejected the idea of corporate liability. Thus, corporate liability has not attained a discernable, 27. CAL. CIV. CODE § 1714.43 (West 2010). 28. Christian Brothers Investment Services Leads Investor Coalition to Encourage Governor’s Support of California Supply Chain Transparency Bill, PRNEWSWIRE, Sept. 16, 2010, http://www.prnewswire.com/news-releases/ christian-brothers-investment-services-leads-investor-coalition-to-encourage-governors-support-of-california-supply-chain-transparency-bill-103058499.html. 29. Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111 (2d Cir. 2010). 30. Ingrid Wuerth, Wiwa v. Shell: The $15.5 Million Settlement, 13 ASIL INSIGHT 14, Sept. 9, 2009, available at http://www.asil.org/insights090909.cfm. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 186 THE INTERNATIONAL LAWYER much less universal, acceptance among nations of the world in their relations inter se, and it cannot not, as a result, form the basis of a suit under the ATS.31 The question of whether corporations are properly liable under the ATS was left unsettled by the Supreme Court in Sosa v. Alvarez-Machain.32 In Kiobel, the majority stated that “the fact that corporations are liable as juridical persons under domestic law does not mean that they are liable under international law (and, therefore, under the ATS).”33 With this statement, the Kiobel Court directly addressed the question posed in a footnote in Sosa. In that footnote, the Supreme Court stated that an evaluation of whether a norm of international law was sufficiently definite to support a cause of action under the ATS involved the “related consideration” of “whether international law extends the scope of liability for a violation of a given norm to the perpetrator being sued, if the defendant is a private actor such as a corporation or individual.”34 The Court in Kiobel took up this “related consideration” and found that corporations are not proper defendants in ATS cases because “the principle of individual liability for violations of international law has been limited to natural persons—not ‘juridical’ persons such as corporations.”35 Before Kiobel, several post-Sosa appellate court decisions have upheld jurisdiction over corporate defendants. In Presbyterian Church v. Talisman, the Second Circuit assumed (without deciding) that corporations may liable for the violations of customary international law.36 In Khulumani v. Barclays National Bank Ltd., decided in 2007, defendants did not raise the question of corporate liability on appeal, but the Second Circuit observed that “[w]e have repeatedly treated the issue of whether corporations may be held liable . . . as indistinguishable from the question of whether private individuals may be.”37 In Kiobel, the Second Circuit noted that its earlier decisions had contained this uncertainty, and then declined to find corporate liability under the ATS. Advocates for corporate liability will find support in the concurring opinion in Kiobel, written by Judge Pierre Leval, in which he strongly criticized the majority opinion’s finding on corporate liability as “[w]ithout any support in either the precedents or the scholarship of international law.”38 In his critique, Judge Leval questioned the potential impact of the majority’s ruling, stating that: [a]ccording to the rule my colleagues have created, one who earns profits by commercial exploitation of abuse of fundamental human rights can successfully shield those profits from victims’ claims for compensation simply by taking the precaution of conducting the heinous operation in the corporate form.39 The Kiobel decision represents one of the most significant ATS decisions in years. That said, it is far too early to conclude that this is the end of ATS litigation for companies. 31. 32. 33. 34. 35. 36. 37. 38. 39. Kiobel, 621 F.3d at 148-49. Sosa v. Alvarez-Machain, 542 U.S. 692, 724 (2004). Kiobel, 621 F.3d at 118. Sosa, 542 U.S. at 732 n.20. Kiobel, 621 F.3d at 119. Presbyterian Church of Sudan v. Talisman Energy, Inc., 582 F.3d 244, 261 n.12 (2d Cir. 2009). Khulumani v. Barclay Nat’l Bank Ltd., 504 F.3d 254, 282 (2d Cir. 2007) (Katzmann, J., concurring). Kiobel, 621 F.3d at 150 (Leval, J., concurring). Id. at 149-50. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CORPORATE SOCIAL RESPONSIBILITY 187 2. Bowoto v. Chevron Corp. In September, in Bowoto v. Chevron Corp., the Ninth Circuit Court of Appeals upheld a jury verdict in favor of Chevron Corporation in a case involving plaintiff allegations that Chevron was complicit in human rights abuses committed by Nigerian security forces in 1998.40 Plaintiffs brought claims under the ATS and the Torture Victim Protection Act (“TVPA”). The primary events at issue in the litigation took place at an offshore platform belonging to Chevron’s Nigerian subsidiary. In December 2008, after a seventeen-day trial, a jury found that Chevron Corporation could not be held liable for abuses committed by the Nigerian government security forces in 1998.41 Plaintiffs appealed the jury verdict, raising challenges to the jury instructions and the District Court’s evidentiary rulings. Plaintiffs also appealed two points of law, including the District Court’s ruling that the TVPA does not apply to corporations. The Court of Appeals fully affirmed the District Court’s judgment, including the finding that plaintiffs’ ATS claims were preempted by the Death on the High Seas Act. With regard to the TVPA claims, the Court determined that “the plain language of the TVPA does not allow for suits against a corporation.”42 This decision conflicts with a 2005 Eleventh Circuit decision where the Court held, without discussion, that the TVPA applied to corporate actors.43 3. Sarei v. Rio Tinto In October 2010, an en banc panel of the Ninth Circuit Court of Appeals referred Sarei v. Rio Tinto to a mediator “to explore the possibility of mediation.”44 The case involved claims by current and former residents of the island of Bougainville, Papua New Guinea, who alleged that they were the victims of numerous violations of international law as the result of the mining operations of Rio Tinto Plc. In July 2009, the District Court for the Central District of California had declined to find that a prudential exhaustion requirement was appropriate given the facts and circumstances of the case.45 The case had been remanded to the District Court after a December 2008 ruling by the Ninth Circuit Court of Appeals in which the Court found that certain claims brought under the ATS “are appropriately considered for exhaustion under both domestic prudential standards and core principles of international law.”46 In February 2011, after the appointed mediator “completed the exploration of the possibility of mediation,” the case was returned to the en banc court.47 40. Bowoto v. Chevron Corp., 621 F.3d 1116, 1120 (9th Cir. 2010). 41. Bowoto v. Chevron Corp., No. C 99-02506, 2009 U.S. Dist. LEXIS 38174, at *7-8 (N.D. Cal. 2009). 42. Bowoto, 621 F.3d at 1126. 43. Aldana v. Del Monte Fresh Produce, N.A., Inc., 416 F. 3d 1242, 1244 (11th Cir. 2005). 44. Sarei v. Rio Tinto, 625 F.3d 561, 562 (9th Cir. 2010). 45. Sarei v. Rio Tinto, 650 F. Supp. 2d 1004, 1032 (C.D. Cal. 2009). 46. Sarei v. Rio Tinto, 550 F.3d 822, 824 (9th Cir. 2008). 47. Sarei v. Rio Tinto, Order, No. CV 02-56256 (9th Cir. Feb. 11, 2011). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 188 THE INTERNATIONAL LAWYER 4. Doe v. Nestle In Kiobel, the Second Circuit cited to Doe v. Nestle, a decision by the District Court for the Central District of California which pre-dated Kiobel by a week and which also found that “corporations cannot be held directly liable under the Alien Tort Statute for violating international law.”48 The case was brought as a class action suit by plaintiffs from Mali, including children, who alleged that they were forced to work on cocoa plantations in Mali that supplied the defendants. The District Court observed that “domestic courts have almost uniformly concluded that corporations may be held liable for violations of international law”49 but then found that “[t]here is no support in the relevant sources of international law for the proposition that corporations are legally responsible for international law violations.”50 Ultimately, the Court stated that, “[t]o the extent that corporations should be liable for violating international law, that is a matter best left for Congress to decide.”51 5. Flomo v. Firestone In October, the District Court for the Southern District of Indiana relied upon the Second Circuit’s decision in Kiobel,52 in granting defendant’s motion for summary judgment in an ATS suit against the Firestone Natural Rubber Company. The case, Flomo v. Firestone Natural Rubber Company, involved claims by plaintiffs that the company’s Liberiabased subsidiary had forced certain employees of its Liberian rubber plantation to put their children to work.53 Citing Kiobel, the District Court held that the plaintiffs “failed to establish a legally cognizable claim because no corporate liability exists under the ATS.”54 In a review of the majority and concurring opinions in Kiobel, the District Court found that “the approach of the Kiobel majority—no corporate liability under the ATS unless and until international law (or Congress) affirmatively approves the doctrine—better comports with the mandate in Sosa that ATS liability only attaches after a consensus exists that a defendant’s conduct violates international law.”55 The Court also cited to an Eleventh Circuit case, Enahoro v. Abubakar,56 in emphasizing the important “door-keeping” role of courts in reviewing the viability of claims under the ATS. 6. Supreme Court Denies Petitions for Writs of Certiorari in Two ATS Cases On two occasions in 2010, the United States Supreme Court denied petitions for writs of certiorari in cases involving claims under the ATS. 48. Doe v. Nestle, No. CV 05-5133, 2010 WL 3969615, at *62 (C.D. Cal. 2010). 49. Id. at *61. 50. Id. at *74. 51. Id. 52. Kiobel, 621 F.3d at 120. 53. Flomo v. Firestone Natural Rubber Co., No. 1:06-cv-00627, 2010 WL 3938312, at *1 (S.D. Ind. 2010). 54. Id. at *7. 55. Id. at *5 (citing Kiobel and Sosa). 56. Enahoro v. Abubakar, 408 F.3d 877, 886 (7th Cir. 2005). In Sosa v. Alvarez-Machain, the Supreme Court stated that the “recognition of actionable international norms . . . should be exercised on the understanding that the door is still ajar subject to vigilant door keeping, and thus open to a narrow class of international norms[.]” Sosa, 542 U.S. at 729. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW CORPORATE SOCIAL RESPONSIBILITY 189 In October, the Supreme Court denied certiorari in response to plaintiffs’ petition, and defendant’s conditional cross-petition, seeking review of the Second Circuit’s decision in Presbyterian Church of Sudan v. Talisman Energy, Inc.57 The Second Circuit’s decision upheld a lower court decision dismissing the case,58 which involved allegations that Talisman Energy aided and abetted the Sudanese Government in committing human rights abuses in Southern Sudan. The Second Circuit’s earlier decision held that companies may only be found liable for violations of customary international law under an aiding and abetting theory of liability if they provide substantial assistance to the primary violator with the intent of furthering the human rights violation. The Court determined that international law is the proper source for establishing a standard for accessory liability, and that “the mens rea standard for aiding and abetting liability in ATS actions is purpose rather than knowledge alone.”59 Notably, the 2009 decision predates the Second Circuit’s recent decision in Kiobel, in which the Court held that corporations cannot be sued under the ATS for violations of customary international law. In June, the Supreme Court declined to grant a petition for a writ of certiorari filed by Pfizer Inc. seeking review of a January 2009 decision by the Second Circuit, which held that Nigerian plaintiffs could properly bring claims against Pfizer under the ATS for “violation of the norm of customary international law prohibiting medical experimentation on human subjects without their consent.”60 The Second Circuit decision represents the only time that a court has found that the failure to gain informed consent for medical testing is a cognizable claim under the ATS. D. NON-U.S. LEGISLATION 1. Bill C-300 in Canada In late October, Bill C-300, An Act Respecting Corporate Accountability for the Activities of Mining, Oil or Gas in Developing Countries, was narrowly defeated in the Canadian House of Commons.61 Bill C-300, a private member’s bill originally introduced by Liberal MP, John McKay, in February 2009, called for the creation of a set of CSR guidelines for use in determining the eligibility of Canadian companies for government support for their international activities. The bill would have also created a complaints mechanism, whereby complaints could be filed with the Ministers of Foreign Affairs and International Trade regarding a company’s compliance with the guidelines. 57. Presbyterian Church of Sudan v. Talisman Energy, Inc., 582 F.3d 244, 268 (2nd Cir. 2009). 58. Presbyterian Church of Sudan v. Talisman Energy, Inc., 453 F.Supp.2d 633, 689 (S.D.N.Y. 2006). 59. Presbyterian Church of Sudan, 582 F.3d at 259. 60. Abdullahi v. Pfizer, Inc., 562 F.3d 163, 187 (2d Cir. 2009). 61. Matthew McClearn, Mining: The End of Bill C-300, CANADIAN BUS., Dec. 6, 2010, http://www.canadianbusiness.com/markets/commodities/article.jsp?content=20101206_10007_10007. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Commercial Transactions, Franchising, and Distribution ARNOLD S. ROSENBERG, NEIL RAY, KIMBERLY A. PALMISANO, LAURA A. PETER, ALAN S. GUTTERMAN, GLENYS P. SPENCE, AND ANDERS FORKMAN* I. EC Vertical Restraints Block Exemption Regulation and Guidelines on Vertical Restraints On June 1, 2010, new European Union (“EU”) competition rules on supply and distribution agreements entered into force. The rules apply to all business sectors except motor vehicles. This section provides a summary of the new EU competition rules and also briefly compares the application of U.S. antitrust law to restrictions in vertical agreements. The new EU legal framework consists of the new European Commission (“EC”) Vertical Restraints Block Exemption Regulation (“VBER”)1 and related Guidelines on Vertical Restraints (“EC Guidelines”).2 The new rules use the term “vertical” to refer to supply and distribution agreements entered into between companies operating at different levels of the production chain, such as agreements between manufacturers and wholesalers or retailers.3 The EC is concerned only with those types of vertical “restraints” or restrictions on competition that arise when there is some degree of market power, either at the level of the supplier, the buyer, or both.4 * This article covers developments during 2010. The authors are Arnold S. Rosenberg, Assistant Dean and Director of the Walter H. and Dorothy B. Diamond Graduate Program, Thomas Jefferson School of Law, San Diego, California (Committee Editor); Neil Ray, Sheppard Mullin Richter & Hampton LLP, San Diego (Section I); Kimberly A. Palmisano, Law Offices of Palmisano & Moltz, Chicago (Section II-A); Laura A. Peter, Global General Counsel LLC and Alan S. Gutterman, General Counsel, ASI Computer Technologies (Section II-B); Glenys P. Spence, Assistant Professor, Phoenix School of Law, Phoenix, Arizona (Section III); and Anders Forkman, Partner, Advokatfirman Vinge, Malmo, Sweden (Section IV). 1. European Commission Regulation 330/10, On the application of Article 101(3) of the Treaty on the Functioning of the European Union to Categories of Vertical Agreements and Concerted Practices, 2010 O.J. (L 102) (EU) [hereinafter VBER]. 2. European Commission Guidelines on Vertical Restraints, 2010 O.J. (C130) [hereinafter EC Guidelines]. 3. See EC Memorandum, Memo 10/138, Antitrust: Commission adopts revised competition rules for vertical agreements: frequently asked questions 1 (Apr. 20, 2010), available at http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/10/138&format=PDF&aged=0&language=EN&guiLanguage=en. 4. See, e.g., EC Guidelines, ¶¶ 6, 23. 191 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 192 THE INTERNATIONAL LAWYER The VBER “block exempts,” or provides a safe harbor for, supply and distribution agreements concluded between companies that have limited market power, defined as a market share of both the supplier and buyer not exceeding thirty percent of their relevant market.5 To qualify for the safe harbor, agreements must contain no “hardcore restrictions.”6 Agreements qualifying for this “block exemption” receive a positive presumption that the agreements will not have anticompetitive effects and are exempted from the prohibition against anticompetitive agreements set out in Article 101(1) of the EU Treaty.7 For vertical agreements concluded by companies whose market share exceeds thirty percent, there is no exemption and no presumption that the agreement is either legal or illegal.8 It will be necessary to assess the agreement’s positive and negative effects on the market based on the EC Guidelines accompanying the VBER.9 The VBER lists a series of specific arrangements, labeled as “hardcore restrictions,” that are considered so serious that their inclusion in an agreement will preclude that agreement from benefiting from the safe harbor exemption, regardless of the parties’ market shares.10 Hardcore restrictions include restraints on the buyer’s ability to determine its sale price, commonly referred to as resale price maintenance (“RPM”), or certain types of resale restrictions, which may create barriers to the EU’s internal market.11 Manufacturers can, however, encourage an exclusive distributor to invest in an exclusively allocated territory or customer group by protecting them from active sales by other distributors.12 The manufacturer cannot restrict its distributor from responding to customers’ direct demands, known as “passive sales.”13 The VBER also allows manufacturers to choose their distributors on the basis of specified criteria and to prohibit sales to unauthorized distributors, known as a “selective distribution” system.14 Selected distributors must retain the ability to sell to other authorized distributors and to any end consumer.15 Any other restriction of their freedom regarding where and to whom they may sell would be a hardcore restriction. The new EC Guidelines contain a detailed discussion of Internet sales. Some of the most controversial issues that arose under the previous rules concerned the extent to which suppliers could limit the Internet sales activities of their distributors. The new guidelines attempt to strike a balance between allowing consumers to take advantage of cross-border purchasing and protecting against those distributors that “free-ride” on the promotional and marketing investments of other distributors.16 The following restrictions on passive selling included in the EC Guidelines are considered hardcore restrictions on Internet sales: an absolute prohibition on Internet sales, requiring distributors to re5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. See VBER, arts. 3-4. Id. art. 4. See infra notes 10-15 and accompanying text. See, e.g., VBER, art. 2(1). See, e.g., EC Guidelines, ¶ 96. Id. ¶ 97. See VBER, art. 4. Id. See VBER, art. 4(b)(i). See EC Guidelines, ¶ 51. Id. ¶¶ 174-88. See VBER, art. 4(c) & (d); EC Guidelines, ¶ 174. See EC Guidelines, ¶¶ 52-54. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW COMMERCIAL TRANSACTIONS 193 strict access to their website for customers outside their territory or refuse payments by credit cards not issued in their country, limiting the proportion of a distributor’s sales over the Internet, and requiring Internet product prices to be higher than offline sales.17 Suppliers have the ability to protect an exclusive distribution system by restricting active sales and regulating online sales to maintain the quality of the distribution network and to prevent free-riding. Consequently, suppliers can prevent distributors from selling only on the Internet and refusing to supply pure online players, impose quality and service conditions which must be equivalent to conditions applicable to offline sales, require a certain absolute amount of products be sold through retail store and fixed-fee to support distributor’s online or offline efforts, and condition the use of third party platforms only in accordance with agreed standards.18 The presumption remains in the EC Guidelines that the inclusion of hardcore restrictions will be anticompetitive, violating Article 101(1) and therefore unlikely to benefit from the exemption provided in Article 101(3).19 But the new EC Guidelines allow greater room for argument that the Article 101(3) exemption may apply even to hardcore restrictions if it can be shown that they generate efficiencies. The clearest example of this exemption is the new text setting out the three circumstances in which fixed or minimum RPM may be exempted, a possibility not even contemplated under the prior rules.20 The EC Guidelines state that minimum RPM may be necessary to induce distributors to invest efforts in introducing a new product or brand; to coordinate a short term (six to eight weeks), low price campaign; or to encourage distributors to provide additional pre-sales services.21 It will be for the parties to the agreement to prove that the criteria for the exemption are met.22 The EC and many national competition authorities (“NCAs”) and courts are expected to remain cautious in attributing economic benefits to resale price maintenance, but those NCAs and courts that favor a more generous approach may be emboldened by the new EC Guidelines. The EC Guidelines also contain new provisions on how the EC will assess agreements for “up front access payments” (“UAPs”)23 and “category management” agreements.24 The EC Guidelines define UAPs as fixed fees that suppliers pay to distributors for services such as the provision of shelf space for the supplier’s product or access to the distributor’s promotional campaign and, in principle, are exempted by the VBER.25 Even where UAPs are not block exempted, the EC recognizes that such arrangements can contribute to more efficient allocation of shelf space for new products and can prevent suppliers from free-riding on distributors’ promotional efforts.26 On the other hand, the EC recognizes that their widespread use by retailers can increase barriers to entry for small entrants and can potentially result in an anticompetitive exclusion from the market or collusion be17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Id. Id. Id. Id. Id. Id. Id. Id. Id. Id. ¶ 52. ¶¶ 53-54. ¶ 47. ¶¶ 223-29. ¶ 225. ¶¶ 203-08. ¶¶ 209-13. ¶ 203. ¶¶ 207-08. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 194 THE INTERNATIONAL LAWYER tween distributors.27 Category management agreements allow a distributor to appoint a leading supplier in charge of its marketing of a particular product category and may be exempted by the VBER.28 When the exemption does not apply, the possible benefits–in terms of access to marketing expertise and economies of scale–will need to be balanced against the risks of anticompetitive exclusion of other suppliers and possible collusion between suppliers and distributors.29 U.S. antitrust law contains no direct analogue to the VBER, but it does make a distinction between vertical and horizontal agreements that can affect the standard applicable in determining the lawfulness of the arrangement. Historically, U.S. antitrust law has distinguished between vertical non-price agreements (such as customer or territorial restrictions) and vertical price agreements (such as the imposition of a minimum or maximum resale price).30 Vertical non-price agreements are evaluated under a rule of reason, which requires a balancing of pro-competitive benefits versus anticompetitive effects. The U.S. Supreme Court has held that non-price restraints have “real potential to stimulate interbrand competition.”31 Robust interbrand competition, according to the Court, provides a significant check on any increase in intrabrand market power resulting from the implementation of vertical non-price restraints.32 In declining to apply a per se rule of illegality and adopting instead a rule of reason analysis, the Court held that the adverse competitive effect of vertical non-price restraints on intrabrand competition generally is outweighed by the “market-freeing” benefits that such restraints can provide to interbrand competition.33 To establish a violation in such cases, plaintiffs will generally be required to demonstrate that the defendant possesses market power in a properly defined relevant market and that the challenged practice harms competition in that market (e.g., resulting in higher prices or reduced output). Vertical price-related restrictions were also generally evaluated under a rule of reason analysis with one exemption: minimum resale price maintenance. But in a 2007 case, Leegin Creative Leather Products, Inc. v. PSKS, Inc.,34 the U.S. Supreme Court overruled its ninety-six year-old precedent requiring application of the per se rule to vertical minimum resale price maintenance agreements, and held instead that such agreements should be assessed under the rule of reason. Under Leegin, a court will focus on the net pro-competitive or anti-competitive effect of resale price maintenance. The Court held that resale price maintenance can be pro-competitive because it may stimulate interbrand competition by (1) reducing intrabrand price competition and thereby increasing non-price competition among the manufacturer’s retailers; (2) encouraging retailers to increase tangible or intangible services or promotional efforts to support a brand; (3) discouraging discount retailers from free-riding on retailers that furnish services; and (4) facilitating market entry for new firms or brands.35 The Court nevertheless held that resale price maintenance can 27. Id. ¶¶ 204-06. 28. Id. ¶ 209. 29. Id. ¶¶ 209-13. 30. See, e.g., Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977). 31. Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 724 (1988) (citing Continental T.V., Inc., 433 U.S. at 52 n.19). 32. See, e.g., Business Elecs. Corp., 485 U.S at 725. 33. Id. at 726. 34. Leegin Creative Leather Prod., Inc. v. PSKS, Inc, 551 U.S. 877 (2007). 35. Id. at 890-91. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW COMMERCIAL TRANSACTIONS 195 be anticompetitive if it facilitates a manufacturer or retailer cartel or is used by a powerful manufacturer to “give retailers an incentive not to sell the products of smaller rivals or new entrants” or a powerful retailer to “forestall innovation in distribution that decreases costs.”36 The Court provided some guidance for analyzing resale maintenance agreements under the rule of reason, stating that “certain factors are relevant to the inquiry,” including the number of manufacturers engaged in that practice in the market, whether the restraint is at the request of the retailers or manufacturer, and whether the manufacturer or retailers driving the practice possess market power.37 Whether applying EU competition law or U.S. antitrust law, the analysis of restrictions in vertical agreements requires a knowledgeable and independent assessment that takes into account the facts and circumstances of the restrictions’ likely competitive effect. As the EC Guidelines acknowledge, “[f]or most vertical restraints competition concerns only arise if there is insufficient competition at one or more levels of trade, that is, there is some degree of market power at the level of the supplier or the buyer or at both levels.”38 As a practical matter, the analysis of distribution agreements under EU competition law and U.S. antitrust law may result in similar outcomes. There remain some important differences, in particular, when a distribution agreement may threaten the integration of the single market–one of the fundamental bases of the EU. II. Standard Terms in Contracts for the Sale of Goods A. INCOTERMS 2010 Incoterms are rules published by the International Chamber of Commerce (“ICC”), that are commonly used in international trade and that provide standard definitions of the rights and obligations of the parties in contracts for the sale of goods. Although courts and other governmental authorities may choose to rely on Incoterms definitions in construing contract terms even where the parties have not expressly referred to Incoterms definitions in their contract,39 it is good practice for the parties to expressly incorporate Incoterms definitions by reference when desired. The ICC published the first version of Incoterms in 1936, with subsequent revisions published in 1953, 1967, 1976, 1980, 1990, 2000, and 2010. From their inception, Incoterms were intended to be a guide for international trade and practice. To keep pace with the development of international trade and technology, the ICC has updated the Incoterm rules on a regular basis. Practitioners in global trade use Incoterms for guidance in their transactions, in order to reduce transaction costs and the risk of legal complications. The 2010 edition of Incoterms is the eighth edition of Incoterms promulgated by the ICC.40 Effective on January 1, 2011, Incoterms 2010 revises core provisions in the 2000 36. Id. at 893-94. 37. Id. at 897-98. 38. See EC Guidelines, ¶ 6. 39. See, e.g., S.K.I. Beer Corp. v. Baltika Brewery, 612 F.3d 705, 707 n.2 (2d Cir. 2010). 40. Int’l Chamber of Commerce, Incoterms 2010: ICC Official Rules for the Interpretation of Trade Terms (2010) (hereinafter “Incoterms 2010”). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 196 THE INTERNATIONAL LAWYER edition of Incoterms. The new edition includes the following key changes from prior editions: 1. Expansion of Rules to Cover Domestic Trade Reflecting the increased use of standard terms in both domestic and international commerce, Incoterms 2010 formally recognize Incoterms as applicable in both domestic and international transactions. This recognition was accomplished in Incoterms 2010 by adding language to several of the rules to the effect that export and import formalities will only need to be complied with where applicable. Previous Incoterms editions specifically stated that they were to be used only in global trade and did not mention domestic application. Therefore, before Incoterms 2010 became effective, parties in each country typically used their own trade terms in domestic contracts for the sale of goods. 2. Separation of Rules Applicable to Maritime Transport from Rules Applicable to “Any Mode” of Transport In an effort to classify and simplify Incoterms, the ICC assigned the eleven Incoterms into two distinct classifications: “rules for any mode or modes of transportation” and “rules for sea and inland waterway transport.”41 Under the former classification, Incoterms Ex Works (“EXW”), Free Carrier (“FCA”), Carriage Paid to (“CPT”), Carriage and Insurance Paid to (“CIP”), Delivered at Terminal (“DAT”), Delivered at Place (“DAP”), and Delivered Duty Paid (“DDP”) may be used “irrespective of the mode of transport selected and irrespective of whether one or more than one mode of transport is employed.”42 Specifically, they can be used where no maritime transport is used or where a ship is used for part of the carriage.43 Under the latter classification, Incoterms Free Alongside Ship (“FAS”), Free On Board (“FOB”), Cost and Freight (“CFR”) and Cost, Insurance and Freight (“CIF”) can be used where the point of delivery and the place where the goods are carried to are both ports. Thus, the Incoterms FAS, FOB, CFR, and CIF now belong only in the maritime rules. In the definitions of FOB, CFR, and CIF, the phrase “ship’s rail” has been deleted and the reference now is to delivery of goods “on board.” FAS and FOB do not apply to multimodal sea transport in containers.44 3. Replacement of Incoterms; New Incoterms Incoterms 2010 reduces the total number of Incoterms from thirteen to eleven by eliminating four old Incoterms and adding two new ones. The 2000 edition used the following terms: Delivered At Frontier (“DAF”), Delivered Ex Ship (“DES”), Delivered Ex Quay (“DEQ”) and Delivered Duty Unpaid (“DDU”). In the 2010 edition, these four terms have been replaced by: Delivered at Terminal (“DAT”) and Delivered at Place (“DAP”). This reduction helps clarify and simplify the terms of delivery. In accordance with the former Delivery Ex Quay rule, DAT defines “delivery” to mean the goods are at the 41. 42. 43. 44. Id. at 7. Id. Id. Id.; see also id. at 715. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW COMMERCIAL TRANSACTIONS 197 buyer’s disposal once unloaded from the arriving means of transport.45 DAP follows the former DAF, DES, and DDU rules and defines “delivery” such that “the goods are at the buyer’s disposal ‘on the arriving means of transport ready for unloading . . . at the named place of destination.’”46 4. Guidance Notes The ICC also added guidance notes in the latest edition to help practitioners and traders understand Incoterm rules. In particular, the notes are designed to assist practitioners in understanding the essence of each Incoterm rule, such as when a rule should be applied, when risk passes, and how costs are allocated between the seller and the buyer. 5. Electronic Communications Under Incoterms 2010, electronic means of communications are given the same effect as paper communication. Articles A1/B1 specifically state that any document referred to in A1 to A10 [or B1 to B10] may be an equivalent electronic record or procedure if agreed to between the parties or customary.47 The ICC adopted these provisions because it recognized that parties are increasingly moving towards replacing paper communications with electronic communications, and it anticipated that this trend would increase during the next decade before the Incoterms undergo another revision. 6. Carriage and Insurance Information Incoterms 2010 also more conspicuously place information duties on the seller and the buyer relating to contracts of carriage and insurance in articles A3/B3. (These provisions were moved from the generic articles A10/B10 of Incoterms 2000 into current articles A3/ B3). Information relating to carriage and insurance is important so that both parties are put on notice of the responsibilities of each party. Furthermore, Incoterms CIP and CIF take into account the Institute Cargo Clauses, by placing an obligation on the seller to obtain cargo insurance at seller’s expense by complying with minimum coverage under Clause C of the Institute Cargo Clause and additional coverage at buyer’s expense under Clause A or B of the Institute Cargo Clause when required by the buyer. 7. Security-Related Clearances Due to heightened security concerns with respect to the movement of goods, the ICC added new security-related rules. Security-related clearances implemented by Incoterms 2010 allocate obligations between the buyer and seller which require verification that the goods do not pose a threat to life or property for reasons other than their inherent nature. The purpose of this rule is to permit security checks on goods shipped domestically and internationally. Among the specific security-related clearances in Incoterms 2010 are chain-of-custody information, included in articles A2/B2 and A10/B10 of various Incoterms rules. 45. Id. at 54. 46. Id. at 62. 47. Id. at 8. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 198 THE INTERNATIONAL LAWYER 8. Handling Charges Incoterms 2010 clarify the arrangement of allocating handling and carriage costs under CPT, CIP, CFR, CIF, DAT, DAP, and DDP. Typically, the seller must make arrangements for the carriage of the goods to the agreed destination, and the freight costs are normally included in the total selling price. The carriage cost can typically include the cost of handling the goods within the port or terminal, and the carrier or terminal operator may charge its costs to the buyer for these services. Hence, the buyer will want to avoid being double charged by both the seller in the total selling price and by the carrier or terminal operator in the carrier cost. The Incoterms 2010 rules clarify this arrangement by specifically allocating costs in articles A6/B6 of the Incoterms CPT, CIP, CFR, CIF, DAT, DAP, and DDP.48 9. String Sales Incoterms FAS, FOB, CFR, and CIF include the obligation to “procure” goods shipped as an alternative to the obligation to “ship” goods for what are commonly referred to as “string sales.”49 String sales are defined as multiple sales down a chain and are common in commodity trades as opposed to the sale of manufactured goods. In string sales, a seller in the middle of the string “procures” the goods, rather than “ships” the goods, because the goods have already been shipped by the first seller in the string.50 Incoterms 2010 incorporate this language in order to clarify the difference between these two scenarios. B. FAILURE OF AMENDED ARTICLE 2, UNIFORM COMMERCIAL CODE In 2003, the National Conference of Commissioners on Uniform State Laws (“NCCUSL”), following approval by the American Law Institute, proposed amendments to the Uniform Commercial Code (“UCC”) article on Sales, Article 2. The proposed amendments, among other things, would have eliminated the definitions of shipping terms contained in former sections 2-319 through 2-324. This proposal was justified on the ground that the Article 2 definitions had become “inconsistent with modern commercial practices,”51 which rely on the parties either to explicitly set their own private contract rules on significant shipping related issues (e.g., risk of loss, delivery location, insurance, carrier, and expenses) or rely on standard definitions used in trade such as those contained in the Incoterms. The proposed elimination of shipping terms in Amended Article 2 would have been consistent with the approach to this issue taken by the United Nations Convention on Contracts for the International Sale of Goods (“CISG”),52 which does not define or prescribe shipping terms.53 While the logic behind the elimination of the shipping terms in 48. Id. at 36-37, 48-49, 56-57, 64-65, 72-73, 100-01, 112-13. 49. Id. at 79, 87, 95, 105. 50. Id. 51. Legislative Note to Amended U.C.C. art. 2, §§ 2-319-24 (repealed). 52. United Nations Convention on Contracts for the International Sale of Goods, opened for signature Apr. 11, 1980, 19 I.L.M. 668. 53. See, e.g., United Nations Convention on Contracts for the International Sale of Goods (“CISG”), art. 32(2) (“If the seller is bound to arrange for carriage of the goods, he must make such contracts as are neces- VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW COMMERCIAL TRANSACTIONS 199 Amended Article 2 was compelling, seven years later, not a single state has adopted Amended Article 2.54 It appears that the 2003 amendments will never achieve widespread acceptance for reasons that have little or nothing to do with the proposed elimination of former sections 2-319 through 2-324.55 Nonetheless, with the recent implementation of Incoterms 2010, it would seem to be a good time for contracting parties in the United States to review their standard practices with regard to shipping terms. Article 2 definitions of shipping terms are in some ways inconsistent with the Incoterms definitions and may not comport with the parties’ expectations, yet contracting parties in the United States have often displayed a distressing tendency to incorporate Article 2 by reference without careful consideration of the implications of doing so. Attorneys in the United States who are engaged in drafting contracts for the sale of goods would do well to abandon their almost automatic reliance on Article 2 of the UCC in favor of either Incoterms or non-Incoterms language that clearly describes the preferred position of the drafter with respect to shipment of goods and allocation of the risk of loss. The modification of Incoterms to include domestic sale contracts gives parties to sale contracts within the United States a standardized and convenient alternative to reliance on Article 2 shipping term definitions. It is hoped that contracting parties in jurisdictions such as the United States will increase their reliance on Incoterms, as opposed to the default rules contained in the unamended version of Article 2 of the UCC that remains in effect in all fifty states. III. U.N. Convention on Contracts for the International Sale of Goods (“CISG”) On July 8, 2010, the Dominican Republic and Turkey became the 75th and 76th countries to accede to the CISG.56 Originally ratified by eleven countries in 1988, the twentyfirst century has seen several states sign on, from every geographic region and from various stages of economic development. Most of these newcomers are developing countries in the southern hemisphere and the post-communist countries of Eastern Europe.57 sary for carriage to the place fixed by means of transportation appropriate in the circumstances and according to the usual terms for such transportation.” (emphasis added)). 54. As of late 2010, NCCUSL’s website indicates that Amended Article 2 is still under legislative consideration only in Oklahoma. A Few Facts About The Amendments to UCC Articles 2 and 2A, NAT’L CONFERENCE OF COMM’RS ON UNIFORM STATE LAWS, http://www.nccusl.org/Update/uniformact_factsheets/uniform acts-fs-ucc22A03.asp (last visited Feb. 1, 2011). 55. For discussion of the reasons why Amended Article 2 failed to gain acceptance, see William H. Henning, Amended Article 2: What Went Wrong?, 11 DUQ. BUS. L.J. 131 (2009). 56. See Status: 1980 United Nations Convention on Contracts for the International Sale of Goods, U.N. COMM’N ON INT’L TRADE L., http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html (site last visited on Feb. 1, 2011). The CISG will enter into force on July 1, 2011 for the Dominican Republic, and on August 1, 2011 for Turkey. The accession makes the Dominican Republic the second country in the Caribbean region to adopt the CISG, after Saint Vincent and the Grenadines, which adopted the treaty effective October 1, 2001. See CISG, arts. 98-99. 57. See Camilla Baasch Andersen, Reasonable Time in Article 39 (1) of the CISG–Is Article 39(1) Truly a Uniform Provision?, (Pace University Law Sch., Working Paper, 1998), available at http://cisgw3.law.pace.edu/ cisg/biblio/andersen.html (“The success of the CISG is not surprising. Preceded by the less successful 1964 ULIS, and ULF, the drafting of the CISG was conducted explicitly on the basis of forming more widely SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 200 THE INTERNATIONAL LAWYER The CISG contemplates that uniform rules governing contracts for the international sale of goods should take into account the differences among social, economic, and legal systems. Created to foster the development of international trade on the basis of equality and mutual benefit as an important element in promoting friendly relations among nations, the CISG aims to promote international trade by removing legal barriers in international trade and to unify international sales law.58 In this vein, the CISG provides uniform rules that govern certain aspects of the making and performance of everyday commercial contracts for the sale of goods. The genesis of the CISG lies in the two 1964 Hague Conventions sponsored by the International Institute for the Unification of Private Law (UNIDROIT). The UNIDROIT rules carried little or no weight outside of Western Europe because the rules were viewed as too Eurocentric and irrelevant to legal cultures outside Western Europe.59 The CISG emerged from the efforts of the United Nations Commission on International Trade Law (“UNCITRAL”), in light of the limited acceptance of the Hague Conventions, to remedy the perceived wrongs of Eurocentricity and the archaic rules of the lex mercatoria. The CISG is divided into four main parts. Part I defines the Conventions’ sphere of application and contains provisions as to interpretations, usages and requirements of contractual form.60 Part II deals with the formation of the contract.61 Part III contains the main body of rules on sale of goods,62 and Part IV provides the public international framework.63 The signal mandate of the CISG is contained in its precepts of uniformity guided by the civil law tradition of good faith in the formation of contracts. To this end, Article 7(1) of the Convention provides: “In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.”64 A large part of CISG jurisprudence pivots around Article 7 because of its goal of “erasing disparities in international trade.” In the context of developing countries, like those of the Caribbean, the underpinnings of Article 7 illustrate that the relics of “received legal structures” will be subsumed to allow for uniformity and good faith in the interpretation of acceptable conventions . . . This combined with the ever-growing need to regulate international trade uniformly as the borders of the world become a little less discernible and international trade grows in volume, has made the Convention extremely popular.”). 58. Phanesh Koneru, The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: An Approach Based on General Principles, 6 MINN. J. GLOBAL TRADE 105 (1997). 59. See Alejandro M. Garro, Reconciliation of Legal Traditions in the U.N. Convention on Contracts for the International Sale of Goods, 23 INT’L LAW. 443, 468-69 (1989) (“The so-called “North-South” debate was characterized by (a) the economic fact that developing countries mainly export raw materials and agricultural products and import technology and finished goods, (b) the underdeveloped technological condition of their markets; and (c) their frequently justified mistrust of developed industrial states.”). 60. CISG, arts. 1-13. 61. Id. arts. 14-24. 62. Id. arts. 25-88. 63. Id. arts. 89-101. 64. Id. art. 7 (“In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.”). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW COMMERCIAL TRANSACTIONS 201 contract principles. Several cases provide testimony that the mandates of Article 7 have taken on a life of their own in the adjudication of the CISG.65 Accession to the CISG by the island nations of Saint Vincent and the Grenadines and the Dominican Republic has potential implications for trade in the region as a whole. The threshold question is to what extent other nations in the region will follow suit. This question is important because of the push to reform and unify the legal systems of the members of the British Commonwealth in the Caribbean. Against this backdrop, it is curious that the other nations of the Commonwealth have largely ignored the incorporation of the CISG in their discourse on legal reforms. Nevertheless, ratification by these two countries–one (Saint Vincent and the Grenadines) a common law jurisdiction, the other (Dominican Republic) a country in the civil law tradition–demonstrates that at the very least, a hybrid system of domestic and global legal rules on trade is possible, and should be desirable to the Commonwealth Caribbean nations if legal reform is to have a chance at success.66 Undoubtedly, the idea of a uniform law for developing countries is critical to their economic success given the realities of globalization.67 The adoption of a uniform sales law like the CISG might help to heal the wounds of post-colonial countries, and to facilitate the growth of the economies of the developing South.68 What is most desirable is that the CISG does not presume to champion one legal tradition in favor of another. In fact, the CISG seeks to erase any distinctions between the civil and commercial character of the parties.69 The adoption of international treaties like the CISG can operate within the confines of Caribbean legal traditions in a practical way to move the former colonized nations toward legal uniformity and equity in the area of international trade. 65. See Case Law on UNCITRAL Texts (CLOUT), U.N. COMM’N ON INT’L TRADE L., http://www.uncitral. org/uncitral/en/case_law.html (last visited Feb. 1, 2011). See also Vivian Curran, The Interpretive Challenge to Uniformity, 15 J. L. & COM. 175 (1995) (book review) (Judges in the civil law countries may come to approximate their common law counterparts in increasing their reliance on precedent as a source of binding authority due to the widespread availability of the decisions of common law courts applying the CISG, while judges in common law jurisdictions may come to approximate their civil law counterparts in seeking elucidation of relevant legal principles in scholarly writing on the CISG.). 66. See generally JOHN HONNOLD, UNIFORM LAW FOR INTERNATIONAL SALES UNDER THE 1980 UNITED NATIONS CONVENTION 18 (Harry M. Flechtner ed., 4th ed. 2009) (acknowledging that international legislative machinery is difficult to put into motion where most domestic laws have endured for over a century and recommending that the CISG, which “provides for flexibility,” be “read and applied in a manner that permits it to grow and adapt to novel circumstances and changing times.”). 67. See Amy H. Kastely, Unification and Community: A Rhetorical Analysis of the United Nations Sales Convention, 8 NW. J. INT’L L. & BUS. 574, 583-84, n.37 (1988) (quoting sources from the debates on the proposed CISG that the “removal of . . . legal obstacles” to international trade was of “special importance to the developing countries, whose economies depended largely on foreign trade”). 68. See, e.g., Harry M. Flechtner, The Several Texts of the CISG in Decentralized System: Observations on Translations, Reservations and Other Challenges to the Uniformity Principle in Article 7(1), 17 J. L. & COM. 187 (1998). See also Azzouni Ahmad, The Adoption of the 1980 Convention on the International Sale of Goods by the United Kingdom (Pace University Law Sch. Working Paper, 2002), available at http://www.law.pace.edu/cisg/ biblio/azzouni.html (“[C]ritics have complained that the CISG is not well formulated and many norms remain ambiguous and this will not produce uniformity because it will be subject to different national interpretations.”). 69. CISG, art. 1(3). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 202 THE INTERNATIONAL LAWYER IV. Sweden: Notice of Termination of Distributorship Agreements In a decision rendered on November 3, 2009, the Swedish Supreme Court held that there is a general obligation for both parties in a contractual distributorship relationship to provide the other party with reasonable notice in the event of a termination of the contract.70 Although commercial agents and commission agents in Europe are subject to widespread legislation, some of it based on EU legislation, “true” distributors are not equally regulated (the one obvious exception to this general rule being Belgium).71 As with most countries in Western Europe, Sweden lacks specific legislation dealing with distributors. One of the main reasons for this is that trade associations representing suppliers and distributors agreed on a set of standard terms for exclusive distributors in 1984 which, it was generally believed, would become standard practice in the trade.72 As the general terms contained many provisions similar to the Commercial Agency Act,73 which in its turn was a result of European law,74 it was felt that there was no need for specific legislation. It was reasoned that the similarities between the general terms and the Commercial Agency Act made analogous application of the provisions of the latter especially appropriate with respect to distributorship agreements.75 But, this was left to the courts to decide. Case law regarding distributorship agreements remained relatively scarce. In 1989, the Swedish Supreme Court ruled in a case involving a contractual relationship which was deemed to be “more far reaching than an ordinary supply agreement.”76 In the absence of an agreement between the parties, the court found that there had been no obligation on the supplier to provide notice to the buyer/distributor before terminating the contract between the parties. The supplier was entitled to terminate the agreement with immediate effect. Then came the case of the arctic bread distributor. In the small community of Gällivare, situated some 100 kilometers north of the Arctic Circle in Sweden, two companies in the bakery business, Malmberg AB and Allbröd Lapland AB, entered into an agreement regarding the distribution and marketing of Malmberg’s products. The agreement, which was never reduced to writing, also contained obligations on marketing and certain product development. The distributor, Allbröd, bought the products from the supplier, Malmberg, and sold them in its own name, taking the full financial risk. Although the distributor was the supplier’s only source of distribution in the area, it also marketed other brands of bakery products. It was a classic example of a “true” distributorship agreement. 70. Nytt Juridiskt Arkiv [NJA] [Supreme Court] 2009-11-03 p. 672 T203-08 (Swed.), available at http:// www.hogstadomstol.se/Domstolar/hogstadomstolen/Avgoranden/2009/2009-11-03_T_203-08_dom.pdf [hereinafter NJA]. 71. See Loi relative à la résiliation unilateral des concessions de vente exclusive à durée indéterminée [Law on the unilateral termination of exclusive distribution agreements of indefinite duration] July 27, 1961 (Belg.), available at http://suisse.juridat.be/cgi_loi/loi_F.pl?cn=1961072703. 72. Standard Agreement for Exclusive Distributorship,EÅ84, later replaced by EÅ04. See Gärde Wesslau Advokatbyra, Mandatory Notice Period for Termination of a Distributorship, http://www.internationallaw office.com/Newsletters/detail.aspx?g=5c195cf0-9543-4ae4-a178-f4e2d26b7eea&redir=1 (last visited Mar. 30, 2011). 73. LAG OM HANDELSAGENTUR (Svensk författningssamling [SFS] 1991:351). 74. Council Directive 86/553/EEC, 1986 O.J. (L***) xxx (EC) [hereinafter Commercial Agents Directive]. 75. Statens Offentliga Utredningar [SOU] 1984:85 at 186. 76. NJA 1989 A 7. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW COMMERCIAL TRANSACTIONS 203 Some seven years passed when, in 2004 and for reasons irrelevant to the question now at hand, the supplier decided to terminate the agreement with immediate effect. A dispute arose between the two parties, where the supplier claimed payment for goods delivered prior to the termination while the distributor on the other hand claimed damages due to the absence of any period of notice in terminating the distribution agreement. The district court came to the conclusion that the distributor had failed to prove that there had been any agreement on a period of notice for termination between the parties. The court dismissed the possibility that a general obligation of loyalty between two contracting parties could constitute a basis for an implied period of notice. The district court also ruled out the use by analogy of legislation applicable to, inter alia, commercial agents or commission agents. Consequently, the district court held, the supplier had committed no breach of contract for terminating without notice. The appellate court, however, overturned the district court’s decision and found that the supplier was obliged to give the distributor a reasonable period of notice, in this case corresponding to three months.77 After about two years in the appellate process, the case was heard by the Swedish Supreme Court in 2009. In its November 3, 2009 decision, the Supreme Court began by finding that the relationship between the parties must be characterized as a distributorship agreement and that there is no Swedish legislation which directly governs such agreements. Like the court of first instance and the intermediate appellate court, the Supreme Court also found that it had not been established by the evidence in the case that there had been any agreement between the parties regarding notice of termination. The question then remained whether, under Swedish law, there is a general obligation to give notice under a distributorship contract. The high court sought guidance from legislation applicable to comparable contract relationships as well as from case law. But the Supreme Court also expressly took into consideration the fact that distributorship contracts often are of an international nature. Drawing on sources as diverse as section 2-309 of the Uniform Commercial Code, European national legislation, and the Draft Common Frame of Reference (“DCFR”),78 the Supreme Court held that, in the absence of an agreement between the parties to the contrary, a party to a distributorship agreement who wished to terminate the contract had an obligation to give reasonable notice to the other party. This obligation applies regardless of whether it is the supplier or the distributor who is the terminating party. What then constitutes a “reasonable period of notice?” The Supreme Court set down four principal, but not exhaustive, considerations drawn from the DCFR: (i) the intended term of the contractual relationship; (ii) investments made by the other party, to the extent that such investments were reasonable given the contractual relationship; (iii) the time it takes for the other party to find an alternative commercial solution to the situation; and (iv) trade custom.79 But, unlike the DCFR,80 the Supreme Court rejected the notion of a minimum period of notice in favor of a case-by-case inquiry. 77. NJA 2009-11-03 at p. 672. 78. The DCFR is a set of model rules drafted by two working groups consisting of academics representing all the member states of the EU, the Study Group on a European Civil Code, and the Research Group on EC Private Law (Acquis Group). See LAW-NET.EU, http://www.law-net.eu (site last visited Feb. 1, 2011). 79. NJA 2009-11-03 at pp. 672, 693-94. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 204 THE INTERNATIONAL LAWYER The Supreme Court’s analysis of the importance of territorial exclusivity of the distributor is notable: the Court observed that in the case of a termination by the supplier, it is less important that a distributor had exclusivity to sell the products in a specific territory than that the distributor was prevented from selling products other than those of the supplier. The absence of an agreed right to compensation for goodwill created by the distributor during the contract term might also result in a longer period of notice being deemed reasonable. Ultimately, the Supreme Court found that a notice period of three months would have been reasonable in this particular case.81 This aspect of the Court’s ruling was indeed case-specific, and it would be unwise to conclude that a three-month notice period in a long-term distributorship agreement may now be considered the norm. The Swedish Supreme Court seems to be taking international contract law into greater consideration when applying Swedish law, even when, as in this case, the contract was between two Swedish companies and concerned products distributed in Sweden. 80. The DCFR presumes notice reasonable with respect to non-fixed term contracts of commercial agency, franchising, and retailing if at least one month’s notice is given for each year the contract was in force, up to a maximum of 36 months. See DCFR IV.E.-2:302: Contract for an indefinite period; NJA 2009-11-03 at pp. 672, 694. 81. NJA 2009-11-03 at pp. 672, 694. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Intellectual Property Law EDITED BY: AUTHORED MELVYN J. SIMBURG** BY: SUSAN BRUSHABER, ROBIN S. FAHLBERG, HENRY BLANCO WHITE, DANIEL MARUGG, STEPHEN W. FEIERABEND, CAROLINA KELLER JUPITZ, PAUL JONES, MARIANO MUNICOY, BRUCE A. MCDONALD, MATT HOFMEISTER, NAVINE KARIM, CARL KESTENS, MELVYN J. SIMBURG, DAVID TAYLOR, AND MICHELLE WYNNE* I. Patents A. UNITED STATES In Bilski v. Kappos, the Supreme Court found the machine-or-transformation test a useful and important tool, but not the sole test, for determining whether inventions are patent-eligible processes.1 The Court found the claims at issue unpatentable as abstract ideas.2 The Federal Circuit ruled that 35 U.S.C. §112 contains a written description requirement separate from enablement.3 The description must “clearly allow” persons of ordinary skill in the art to recognize that the inventor invented what is claimed.4 In two cases,5 it gave additional guidance on the circumstances that establish justiciable cases or controversies following the Supreme Court’s 2007 MedImmune6 decision. ** Editor in Chief: Melvyn J. Simburg, Simburg, Ketter, Sheppard & Purdy, LLP, Seattle, WA. * Patent Section Editor: Robin S. Fahlberg, Caterpillar Inc., Dunlap, Ill.; Authors: (United States) Robin Fahlberg, Caterpillar Inc.; (Europe) Henry Blanco White, Drinker Biddle & Reath, Phila.; (Switzerland) Daniel Marugg, Stephan W. Feierabend, and Carolina Keller Jupitz, Gloor & Sieger, Zurich; (China) Paul Jones, Jones & Co., Toronto; (Latin America) Mariano Municoy, Moeller IP Advisors, Buenos Aires; (Russia) Bruce A. McDonald, Buchanan Ingersoll & Rooney PC, Alexandria, VA. 1. Bilski v. Kappos, 130 S. Ct. 3218, 3227 (2010). 2. Id. 3. Ariad Pharm. Inc. v. Eli Lilly & Co., 598 F.3d 1336, 1334 (Fed. Cir. 2010). 4. Id. 5. See Innovative Therapies, Inc. v. Kinetic Concept, Inc., 599 F.3d 1377 (Fed. Cir. 2010); HewlettPackard v. Acceleron LLC, 587 F.3d 1360 (Fed. Cir. 2009). 6. MedImmune, Inc. v. Genetech, Inc., 549 U.S. 118 (2007). 205 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 206 THE INTERNATIONAL LAWYER The Court held that a contract between two U.S. companies for performance in the United States may constitute an offer to sell within the United States under §271(a) despite the offer having been negotiated or the contract having been signed abroad.7 The Federal Circuit held in a design patent case that, in light of Supreme Court precedent and Egyptian Goddess,8 the ordinary observer test is the sole test for anticipation as well as infringement.9 In three cases, the Court gave guidance on sufficient evidentiary support needed to support damage calculations in infringement actions.10 The Court addressed §292 false patent marking issues. First, “the plain language of §292 requires courts to impose penalties for false marking on a per article basis.”11 Second, “false marking, combined with knowledge of falsity, merely creates a presumption of intent to deceive, rebuttable by a preponderance of evidence showing there was no purpose to deceive” (even though the article was covered by an expired patent and therefore “unpatented”).12 Third, “a qui tam provision operates as a statutory assignment of the United States’ rights, and the assignee has standing to assert the injury suffered by the assignor” without the individual plaintiff being required to have suffered any injury.13 Lastly, for patent misuse to be a valid defense against patent infringement, the patent in suit must significantly contribute to the practice under attack.14 B. EUROPE 1. European Union The Council of the European Union (EU) approved a Draft Regulation for a unitary European Patent and a unitary Patents Court.15 The proposal provides for national or regional trial courts, and a central appeal court. The European Court of Justice held a hearing on the proposal’s constitutionality.16 7. See Transocean Offshore Deepwater Drilling, Inc. v. Maersk Contractors USA, Inc., 617 F.3d 1296, 1309 (Fed. Cir. 2010). 8. Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665, 678 (Fed. Cir. 2008) (holding the ordinary observer test is the sole test for design patent infringement). 9. See Int’l Seaway Trading Corp. v. Walgreens Corp., 589 F.3d 1233, 1240 (Fed. Cir. 2009) (expanding the use of the ordinary observer test to anticipation analysis). 10. See Wordtech Sys., Inc. v. Integrated Network Solutions, Inc., 609 F.3d 1308 (Fed. Cir. 2010); Resqnet.com, Inc. v. Lansa, Inc., 549 F.3d 862 (Fed. Cir. 2010); Lucent Tech. Inc.v. Gateway, Inc., 580 F.3d 1307 (Fed. Cir. 2009). 11. Forest Group, Inc. v. Bon Tool Co., 590 F.3d 1295, 1304 (Fed. Cir. 2009). 12. Pequignot v. Solo Cup Co., 608 F.3d 1356, 1360-64 (Fed. Cir. 2010). 13. Stauffer v. Brooks Bros., Inc., 619 F.3d 1321, 1325 (Fed. Cir. 2010). 14. Princo Corp. v. Int’l Trage Comm’n, 616 F.3d 1318, 1331 (Fed. Cir. 2010). 15. The Council effectively consists of the appropriate cabinet members from the governments of the member states of the EU. 2982nd Competitiveness Council Conclusions, EUROPEAN COUNCIL (Dec. 4, 2009), http://consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/intm/111744.pdf. 16. European and Community Patents Court, Advocates General Opinion 1/09 (July 2, 2010) 5 J. INTELL. PROP. L. & PRAC. 826 (2010), available at http://jiplp.oxfordjournals.org/content/5/12/826.full?sid=7602e8fc7493-49e0-b922-c56ef8cf8b52. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTELLECTUAL PROPERTY 207 Major changes to the European Patent Convention (EPC) Implementing Regulations came into force.17 The deadline for filing divisional applications is twenty-four months from the first Office Action on the merits in the family of applications, or in response to a later restriction requirement, twenty-four months from the restriction requirement. It will now be mandatory to respond to a negative Patent PCT (Patent Cooperation Treaty) or European search opinion. The existing ban on multiple independent claims will be enforced before search. An EPO Board of Appeal held that there is no general prohibition on double patenting in the EPC.18 The Court of Justice of the EU (ECJ) ruled19 that under the Directive on the legal protection of biotechnological inventions, known as the “Biotechnology Directive,”20 a DNA sequence patent applies only when the genetic information performs its function in the material and is not infringed by its residual presence in processed soy meal, which is a dead material.21 The Directive constitutes an exhaustive harmonization and preempts any contrary national law.22 2. Switzerland In a patent civil dispute, the Federal Supreme Court (FSC) appointed an attorney as court expert, but later decided that the expert could not be considered “neutral,” holding that the same partiality rules for court members apply to court experts. Partiality is presumed if one of the parties in a dispute has an important business relationship to the court expert, even if indirect.23 3. Germany The German Supreme Court ruled24 that an importer of in vitro diagnostic devices from another EU member state who adds German-language labels and instructions must obtain a conformity evaluation under Section 6(2) of the Medical Devices Act, and that the new labels and instructions change the condition of the product, infringing the owner’s rights in the original trademarks. This decision may conflict with EU rules on free circulation of goods.25 17. See generally Council Regulation 2/09, 2009 O.J. (L 296) (EC); EPO Regulation 3/09, 2009 O.J. (299); Council Regulation 20/09, 2009 O.J. (L 582) (EC). 18. Case T-1423/07-3.3.02, Cyclic amine derivative, Boehringer Ingelheim Vetmedica GmbH, (Apr. 19, 2010), http://legal.european-patent-office.org/dg3/pdf/t071423eu1.pdf (patent board of appeals decision not to be published in the official journal of EPO). 19. Case C-428/08, Monsanto Tech. LLC v. Cefetra BV, 2010 E.C.R. 000, ¶¶ 37-38 (July 6, 2010). 20. Directive 98/44, O.J. 1998 (L 213) 13 (EC). 21. Case C-428/08, ¶ 39. 22. Id. ¶¶ 62, 69. 23. Bundesgericht (BGer) [Federal Court] July 26, 2010, 4A_256/2010 (Switz.). 24. Bundesgerichtshof (BGer) [Federal Court] May 12, 2010, I ZR 185/07 (Switz). 25. See Council Directive 93/42, 1993 O.J. (L 169), 1 (EC). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 208 THE INTERNATIONAL LAWYER 4. United Kingdom The House of Lords held26 that when a patent claims a novel and inventive compound per se, the patentable contribution to the art is the compound per se, even though the desirability of that compound was foreseen and the core inventive concept was how to provide it, distinguishing Biogen.27 Therefore, patent protection remains commensurate with the patentee’s contribution to the art. For the first time, U.K. Courts have awarded compensation to an employee inventor on the single ground that the patent was of outstanding benefit to the employer.28 The U.K. law has been amended29 and now also allows an award if the invention, and not merely the patent, is of outstanding benefit to the employer. The English Court of Appeals,30 holding a patent was not infringed, reviewed and rejected an earlier decision of a German appeals court,31 which held the same patent was infringed by the same product. The English court rejected the German court’s approach on the ground that a patentee may choose to limit his claims more narrowly than his original disclosure and should be understood to mean what he says in his claims.32 The English High Court held that when an application for a U.K. patent (in this case, a European Patent Application) claims priority under the Paris Convention but is filed by a person who is not at the filing date the successor in title of all the applicants for the priority application, the claim to priority is incurably invalid.33 C. CANADA Following the Supreme Court’s Apotex decision,34 the IP Office has issued a Practice Note35 on examination for obviousness. The Canadian approach differs from the Graham36 factual inquiries in U.S. law by requiring that the “inventive concept of the claim” should be identified and compared with the cited prior art. Only where that is not possible is the claim as a whole construed and compared with the prior art.37 The Federal Court held an applicant’s disclosure that glossed over an unfavorable reference to be inequitable conduct and argued on the basis of other references that “the teachings of the prior art as a whole” taught away from the claimed invention.38 26. Generics (UK) Ltd. v. H. Lundbeck A/S, [2009] UKHL 12 (A.C.) (appeal taken from EWCA). 27. Biogen Inc v. Medeva Plc [1997] R.P.C. 1 (Eng.). 28. Kelly & Chiu v. GE Healthcare Ltd., [2009] EWHC 181 (Pat) (Eng.). 29. Patents Act, 2004, c.37, §§ 40-41 (U.K.). 30. Occlutech v. AGA Medical Corp., [2010] EWCA (Civ) 702 (Eng.). 31. Oberlandesgericht [OLG] [Higher Regional Court of Düsseldorf] Dec. 22, 2008, available at http:// www.justiz.nrw.de/nrwe/olgs/duesseldorf/j2008/I_2_U_65_07urteil20081222.html. 32. Occlutech v. AGA Medical Corp., [2010] EWCA Civ. 702. 33. Edwards Lifesciences AG v. Cook Biotech Inc., [2009] EWHC 1304 (Pat) (Eng.). 34. Apotex Inc. v. Sanofi-Synthelabo Can. Inc., [2008] 3 S.C.R. 265 (Can.). 35. Practice Note on the Examination for Obviousness, CANADIAN INTELL. PROP. OFFICE, Nov. 2, 2009, http://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/h_wr02152.html. 36. See Graham v. John Deere Co., 383 U.S. 1 (1966). 37. Apotex Inc. v. Sanofi-Synthelabo Can. Inc., [2008] 3 S.C.R. 265, 2008 SCC 61. 38. Lundbeck Canada Inc. v. Ratiopharm Inc., [2009] F.C. 1102, ¶¶ 311-12 (Can.). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTELLECTUAL PROPERTY 209 It also ruled that inducement to infringe a Canadian patent does not require knowledge of the patent, but only knowledge that the inducement will result in the acts of the direct infringer.39 A third case held40 that a computer-implemented business method, whether claimed as a method or as functionally-defined apparatus, is not unpatentable under the Patent Act.41 Specifically, (i) there is no general exclusion of “business methods” from patenting and (ii) computers, as an essential element of the apparatus claims and use of “stored information and ‘cookies’” in the method claims, are sufficiently “tangible” to avoid rejection as “simply a scheme, plan, or disembodied idea.”42 D. AUSTRALIA IP Australia has launched a pilot program for peer review of pending patent applications, allowing third parties to cite prior art and comment on the cited art.43 A hearing officer decided44 that when a document is in a foreign language, without an English abstract, and the skilled reader has no reason to believe it sufficiently relevant to translate, the document does not qualify as prior art for purposes of obviousness. E. CHINA Implementing regulations to China’s Patent Law 2009 amendments include a requirement for a national security review, expansion of grounds for invalidation, and default employee award amounts.45 A new Judicial Interpretation sets out rules for interpreting the scope of claims in a patent and specifically provides for a narrow reading of means-plus-function claims, as in the United States.46 For design patents, the standard for assessing confusion is now the “general consumer” (see Article 10) rather than the “relevant public.” For a prior art defense, there must be at least one piece of prior art, which need not be exactly the same, but must not be substantially different. 39. Bauer Hockey Corp. v Easton Sports Canada Inc., [2010] F.C. 361, ¶¶ 196-203 (Can.). 40. Amazon.com, Inc. v. Att’y Gen. of Canada and the Comm’r of Patents, [2010] F.C. 1011 (Can.) (relating to Amazon’s “one-click” ordering system). 41. See generally Patent Act, R.S.C. 1985, c. P-4 (Can.). 42. Amazon.com, Inc. v. Att’y Gen. of Can. & the Comm’r of Patents, [2010] F.C. 1011. 43. See generally IP Australia, PEER-TO-PATENT AUSTL., http://www.peertopatent.org.au (last visited Jan. 20, 2011). 44. Euroceltique S.A. v. Sandoz Pty Ltd. [2009] A.P.O. 21 (Nov. 12, 2009) (Austl.). 45. Guowuyuan guanyu xiugai zhonghua renmin gongheguo zhuani fa shishi xi ze ( ) [Revisions to the Rules for Implementation of the Patent Law of the PRC], available at http://www.gov.cn/zwgk/2010-01/18/content_1513398.htm (last visited Jan. 20, 2010) (full text of revisions appears in Chinese). 46. Guanyu Shenli Qin fan Zhuanli Quan Jiufen Anjian Yingyong Falu Ruogan Wenti de Jieshi ( ) [Supreme People’s Court Law Interpretation No. 21 on Patent Infringement Disputes], SUP. PEOPLE’S CT. (2009), http://www.law-lib.com/ law/law_view.asp?id=305372 (China). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 210 THE INTERNATIONAL LAWYER The State Intellectual Property Office (SIPO) released draft measures for the registration of security interests in patents.47 F. LATIN AMERICA 1. Chile Notice 00148 clarified the grace period in effect after the Patent Cooperation Treaty entered into force. During the twelve months before the filing date certain disclosures do not affect the novelty of the invention or the application of the non-obviousness standard. 2. Argentina Now applicants may file divisional patent applications only if requested by the examiner.49 Failure to comply with such requests results in abandonment of the application. This resolution modifies prior administrative practices and may restrict the rights of patentees in an unlawful way. 3. Mexico The bi-annual Linkage Gazette (Gaceta de la Propiedad Industrial) of the Mexican Institute of Industrial Property (IMPI) listed existing patents on pharmaceutical active ingredients, but not patents on formulations, despite an earlier Supreme Court decision.50 This publication is the essential tool composing the Mexican system linking IMPI and COFEPRIS (the Mexican Health Authority), the authority in charge of granting marketing approval to commercial pharmaceuticals. Under Mexican law, neither administrative authority is required to follow the Supreme Court’s ruling. Executive regulations implementing statutory amendments included: refining the standard of industrial application; establishing possibilities for third parties to file “non binding” or “informal” oppositions against published applications and granted patents; modifying the procedures for granting preliminary measures to include the opportunity for an infringer to post a higher bond than the right holder in order to continue using or 47. Yijian Zhengqiu “Zhuanli Quan Zhiya Deng ji Banfa” Cao’and Xiuding Shuoming ( ) [Consultation on the Amendment of the “Interim Measures for the Registration of Security Interests in Patents”], STATE INTELL. PROP. OFFICE OF P.R.C. (2010), http://www.sipo.gov.cn/sipo2008/tfs/dtxx/jndt/201005/t20100519_519092.html (China). 48. Circular No. 001/2010, INSTITUTO NACIONAL DE PROPIEDAD INDUSTRIAL, (Feb. 4, 2010), http:// www.inapi.cl/images/stories/Documentos/circulares/CIRCULAR001DIVULGACIONESINOCUAS.pdf. 49. Law No. 147/2010, July 2010, Instituto Nacional de la Propiedad Industrial (Arg.). 50. See Maricarmen Cortes, IMPI y Cofepris niegan extension de patentes [IMPI and Cofepris deny patent extension], EL UNIVERSAL OPINION, Jan. 25, 2010, http://www.eluniversal.com.mx/ columnas/82028.html; Hilario Ochoa Movis, Industria farmacéutica mexicana, en 11vo lugar a nivel internacional [Mexican Pharmaceutical Industry, in 11th Place Internationallyestatal], EL MEXICANO GRAN DIARIO REGIONAL, Jan. 25, 2010, http:// www.el-mexicano.com.mx/informacion/noticias/1/3/ estatal/2010/01/25/353587/industria-farmaceuticamexicana-en-11vo-lugar-a-nivel-internacional.aspx; Bianca Valadez, La Corte cierra el camino a medicamentos genericos [Court Blocks the Way to Generic Drugs], MILENIO.COM, Mar. 23, 2010, http://www.milenio.com/ node/387760. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTELLECTUAL PROPERTY 211 commercializing the invention; criminalization of certain activities and their penalties; and Power of Attorney requirements.51 G. RUSSIA The Russian patent law introduced a six-year period of exclusive protection to patented pharmaceuticals owners for data submitted to the government in support of clinical trials.52 The U.S. Patent and Trade Office (PTO) signed an agreement with Rospatent, designating the latter as an International Searching Authority and International Preliminary Examining Authority under the Patent Cooperation Treaty for U.S. applications.53 II. Trademarks* A. UNITED STATES The Supreme Court held that an agreement among the National Football League (NFL) teams to license their separately owned trademarks collectively and exclusively to a single vendor constituted “concerted action” in violation of Section 1 of the Sherman Act.54 The Court held that the teams were not a single entity formed to promote the NFL brand but competing suppliers and that the exclusive arrangements “deprive the marketplace . . . of actual or potential competition.”55 In Pernod Ricard USA LLC v. Bacardi U.S.A., Inc., the U.S. District Court for the District of Delaware held that “Havana Club” on a Puerto Rican rum did not misrepresent “geographic origin” because it indicated the rum’s Cuban heritage and the label clearly stated that the rum was produced in Puerto Rico.56 “Geographic origin” can encompass some aspect of a product’s history rather than refer exclusively to the place of production.57 In Federal Treasury Enterprise Sojuzplodoimport v. Spirits Intern. N.V., the Second Circuit held that incontestability of the “STOLICHNAYA” mark did not foreclose a challenge to 51. Decreto por el que se reforman y adicionan diversos artı́culos de la Ley de la Propiedad Industrial [Decree That Amends and Adds Various Articles of the Industrial Property Law], Diario Oficial de la Federación [DO], June 18, 2010 (Mex.), available at http://dof.gob.mx/nota_detalle.php?codigo=5147288&fecha= 18/06/2010. 52. State Duma Adopts Civil Code Amendments on a Copyright Protection, RUSS. & CIS BUS. L. WEEKLY, Sept. 28, 2010. 53. Jalena Jankovic, Rospatent to Serve as ISA, IPEA under PCT for US, MONDAQ, Nov. 12, 2010, available at 2010 WLNR 22636706. * Trademark Section Editor: Susan Brushaber, Susan J. Brushaber, PC, Denver, CO; Authors: (United States) Susan Brushaber, Susan J. Brushaber, PC, Denver, Colorado, Matt Hofmeister, Denver, Colorado; (Europe) Herman Croux and Carl Kestens, Max Van Ranst Vermeersch & Partners, Brussels; (China) Paul Jones, Jones & Co., Toronto; (Russia) Bruce A. McDonald, Buchanan Ingersoll & Rooney, PC, Alexandria, Virginia; (Latin America) Mariano Municoy, Moeller IP Advisors, Buenos Aires, Argentina; (Domain Names) David Taylor, Hogan Lovells LLP, Paris. 54. Am. Needle, Inc. v. Nat’l Football League, 130 S. Ct. 2201 (2010). 55. Id. at 2211-12. 56. Pernod Ricard USA LLC v. Bacardi U.S.A., Inc., 702 F.Supp.2d 238 (D. Del. 2010). 57. Id. at 250. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 212 THE INTERNATIONAL LAWYER its ownership from a series of assignments, finding “incontestability” does not affect the issue of whether a subsequent transfer was valid and recordation is not conclusive of its validity.58 In Crash Dummy Movie, LLC v. Mattel, Inc., the Federal Circuit held cancellation of a mark does not equate abandonment, finding that Mattel had overcome the statutory presumption of non-use by demonstrating intent to resume use.59 B. EUROPEAN UNION The ECJ ruled in Google/Louis Vuitton,60 regarding the AdWords function, that Google does not violate trademark law by allowing advertisers to purchase keywords that include their competitors’ trademarks. Google does not use third party trademarks in the “course of trade,” but instead merely stores them without using them in its own commercial messages to consumers. As a service provider, Google may also benefit from the Safe Harbor Provisions of the Electronic Commerce Directive. The ECJ ruled Anheuser-Busch may no longer sell beer named “Budweiser” in Austria, the Czech Republic, or Germany, and may not register the word Budweiser as a Community Mark.61 The ECJ upheld the General Court ruling that the 2005 rules regarding production of evidence of renewal were not to be applied retroactively.62 The ECJ rejected the practice of the Office for Harmonization in the Internal Market (OHIM) to systematically refuse registration of a single letter as a trademark, such as the Greek letter “a,” because it would be “devoid of any distinctive character.” The Court found OHIM had violated trademark law by not undertaking an examination of the facts to determine whether the mark had “distinctive character.”63 The ECJ affirmed cancellation of Lego’s 1999 registration of its iconic three-dimensional brick, finding the studs on the Lego brick were essential to the intended functionality or “technical result” of the product and therefore not entitled to registration as a trademark. The ECJ explained that granting trademark protection would violate public policy by indefinitely extending the time-limited monopolies Lego had enjoyed under U.K. patents.64 C. CHINA The Supreme People’s Court issued an opinion65 to consolidate a number of past decisions. The past decisions include: (i) foreign language trademarks must be evaluated for 58. Fed. Treasury Enter. Sojuzplodoimport v. Spirits Int’l N.V., 623 F.3d 61, 68 (2d Cir. 2010). 59. Crash Dummy Movie, LLC v. Mattel, Inc., 601 F.3d 1387, 1391 (Fed. Cir. 2010). 60. Cases C-236/08 to C-238/08, Google v. Louis Vuitton, 2010 ECJ CELEX LEXIS 62008J0236 (Mar. 23, 2010). 61. Case C-214/09, Anheuser-Busch Inc. v. OHIM, 2010 ECJ CELEX LEXIS 62009J0214 (July 29, 2010). 62. Case T-191/07, Anheuser-Busch Inc. v. OHIM, 2009 ECJ CELEX LEXIS 62007A0191 (Mar. 25, 2009). 63. Case C-265/09, OHIM v. BORCO-Marken-Import Matthiesen GmbH & Co. KG, 2010 ECJ CELEX LEXIS 62009C0265 (May 6, 2010). 64. Case C-48/09, Lego Juris AIS v. OHIM, 2010 ECJ CELEX LEXIS 62009J0048 (Sept. 14, 2010). 65. Zuigao renminfayuan guanyu shenli shangbiao shouquan que quan xingzheng anjian ruogan wenti de yijian ( ) Supreme People’s Court Opinion on VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTELLECTUAL PROPERTY 213 distinctiveness based on the relevant public perception in China; (ii) courts should determine the breadth of a famous foreign trademark’s recognition in China and adjust the scope of protection accordingly; (iii) if distributors and sales agents of foreign goods in China are not authorized to file Chinese trademark applications for such goods, the unauthorized applications are “pirate” applications. The General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China (AQSIQ) announced a phase-out of the “China Top Brand logo.”66 Use of the logo must cease after previously granted rights expire in 2012. This program is distinct from the “well-known mark”67 status that is still available to foreign and domestic companies alike.68 The PRC Trademark Office issued guidelines on examination of trademarks using the characters “ ” (“zhongguo” means “China”) or simply “ ” (“guo” means “state,” “nation,” or “China”).69 SAIC and the PRC Trademark Office used these grounds to reject an application from the Wuliangye liquor Group70 for the mark “ ” or “national liquor.”71 D. SWITZERLAND In its Easyweiss decision, the Swiss Federal Administrative Court (FAC) upheld refusal to register “easyweiss” (“weiss” means “white” in German) for colors, varnish, and plaster, holding the use misleading as suggesting that a surface can effortlessly be painted white.72 It also held that the use of “SINO” with goods not originating from China is misleading.73 The FAC confirmed refusal to register “IPHONE” for mobile electronic devices able to send/receive phone calls and data on descriptiveness grounds,74 stating that the average consumer understands “i” as an abbreviation of internet and “PHONE” as telephone and Several Issues Concerning the Trial of Administrative Cases Involving the Granting and Confirmation of Trademark Rights (Apr. 26, 2010) (China), available at http://rmfyb.chinacourt.org/paper/html/2010-04/26/content_81 67.htm. 66. Zhuan fa guojia zhi jian zong ju guanyu zhongquo mingpai chanpin youxiao qiman hou biaozhi shiyong wenti de tong zhi ( ) Notice regarding the Use of the Famous Brand Logo After Expiration, July 1, 2010, http://www.bjtsb.gov.cn/infoview.asp?ViewID= 22234 (China). 67. See Shangbiao Fa ( ) [Trademark Law] (promulgated by the Standing Comm. of the 5th Nat’l People’s Cong., Aug. 23, 1982, as amended in 1993 and 2001), arts. 13-14 (China). 68. Id. (proposed amendments are now being circulated for discussion) (China), available at http:// www.chinaiprlaw.com/english/laws/laws11.htm). 69. Han zhongguo sho zi wei guo zi shangbiao de shencha shenli biaozhun ( ) [Standards for the Examination of Trademarks using the Characters “Zhongguo” or “Guo” as the First Word, Trademark Office of the State Admin. for Indus. and Commerce], July 28, 2010 (China), available at http://sbj.saic.gov.cn/tz/201007/t20100728_93651.html. 70. WULIANGYE GROUP, http://www.wuliangye.com.cn/en/pages/index.xml (last visited Jan. 20, 2010). 71. Guo jiu shangbiao bohui wei hao ( ) [“National Liquor” Trademark Rejected for Good], SHANXI NEWS ONLINE-SHANXI DAILY, Aug. 31, 2010, http://www.cnipr.com/news/ywdd/201008/ t20100831_120596.html (China). 72. Bundesverwaltungsgericht [BVGE] [Federal Administrative Court] Nov. 11, 2009, B-4053/2009 (Switz.), available at http://www.bundesverwaltungsgericht.ch. 73. Bundesverwaltungsgericht [BVGE] [Federal Administrative Court] Nov. 11, 2009, B-6740/2008 (Switz.), available at http://www.bundesverwaltungsgericht.ch. 74. Bundesverwaltungsgericht [BVGE] [Federal Administrative Court] Nov. 24, 2009, B-6430/2008 (Switz.), available at http://www.bundesverwaltungsgericht.ch. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 214 THE INTERNATIONAL LAWYER Apple had failed to claim that “iPhone” had achieved distinctiveness through intensive use in the marketplace. The FAC refused registration of “MADONNA” for violation of morality,75 finding the religious significance of Madonna as the Mother of Christ overshadowed use of the term in art history and as the name of a famous pop star. The FAC held that “5 A DAY” used in connection with Classes 5 (pharmaceutical, cosmetic articles) and 32 (beer, other beverages) is a generic phrase and cannot be registered as a trademark, reasoning that it would be understood as a dosage instruction with Class 5 products and as a consumption recommendation in Class 32 and therefore constitutes a general promotion slogan that cannot be monopolized.76 Distinguishing design protection from trademark protection, the FAC refused to register packaging in the form of a wave as a three-dimensional trademark in International Classes 29 (fish, fish products) and 43 (food and drink services) in the “three-dimensional trademark” case on the grounds that the packaging lacked distinctiveness and was generic.77 E. RUSSIA The principal Russian trademarks development occurred in the U.S. Court of Appeals for the Second Circuit, which reinstated the claim of the Russian government to the famous STOLICHNAYA vodka trademark in the United States.78 See discussion under Section II.A, supra. PepsiCo had owned the U.S. registration pursuant to an agreement that required transfer back to the Soviet Union upon completion of the agreement term. Upon the collapse of the Soviet Union, it was unclear who had standing to assert the agreement on behalf of the Soviet Union. Plaintiffs contended that the U.S. court was obligated to give force and effect to previous decisions of the Russian courts holding that registrations of STOLICHNAYA in Russia had been fraudulently procured. But, trademark rights are geographic, and foreign court decisions regarding validity and scope are irrelevant and inadmissible in a dispute regarding trademark rights in the United States. F. LATIN AMERICA Puerto Rico’s new trademark law is a compilation of the previous Puerto Rican Trademark Law and United States Trademark Laws, namely the Lanham Act and the Model State Trademark Act. Relevant new provisions include: (i) definitions of “dilution,” “trade dress,” and “secondary meaning,” (ii) the requirement that a statement of continuing use be filed during the fifth year of registration as well as at the time of renewal, (iii) 75. Bundesverwaltungsgericht [BVGE] [Federal Administrative Court] (Switz.), available at http://www.bundesverwaltungsgericht.ch. 76. Bundesverwaltungsgericht [BVGE] [Federal Administrative Court] (Switz.), available at http://www.bundesverwaltungsgericht.ch. 77. Bundesverwaltungsgericht [BVGE] [Federal Administrative Court] (Switz.), available at http://www.bundesverwaltungsgericht.ch. 78. Fed. Treasury Enter. Sojuzplodoimport v. Spirits Int’l N.V., 623 F.3d Apr. 12, 2010, B-2419/2008 Apr. 12, 2010, B-3650/2009 Oct. 15, 2010, B-6313/2009 61, 63 (2d Cir. 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTELLECTUAL PROPERTY 215 elimination of the ability to obtain a Puerto Rican registration based on an existing U.S. registration, (iv) recognition of famous marks, and (v) anti-cybersquatting provisions.79 Pursuant to the U.S.-Peru Trade Promotion Agreement, the Peruvian Legislature issued Decree No. 1075, which introduced: (i) acceptance of multi-class trademark applications, (ii) recognition of collective trademarks, (iii) a requirement that licensees be responsible for the quality of products or services offered in Peru, and (iv) introduction of cancellation procedures.80 In Brazil, the number of trademark applications filed using the local digital system, “EMarcas,” reached record levels during the first half of 2010, representing seventy-two percent of all trademark filings and 2010 may surpass the 111,724 applications filed in 2009.81 E-filing systems are becoming prevalent in Latin America, and their quality is improving quickly. G. DOMAIN NAMES By mid-2010, the number of domain name registrations worldwide increased to 196 million, thirty-nine percent of which were country code top-level domains (ccTLDs). Following the ICANN (the Internet Corporation for Assigned Names and Numbers) Board’s approval of the Internationalized Domain Name (IDN) ccTLD Fast Track Process, there have been thirty-three requests in twenty-two different languages resulting in sixteeen IDN ccTLDs in the DNS (Domain Name System) root zone. IDNs consist of letters or characters from non-ASCII (American Standard Code for Information Interchange) scripts, such as Arabic or Chinese.82 ICANN’s existing generic (gTLD) suffix expansion appears imminent despite numerous objections raised to the application and delegation procedures in the Draft Applicant Guidebook (DAG).83 Trademark owners fear that the new gTLDs will allow increased abuse and on-line infringement. As a result, three trademark protection mechanisms have been incorporated into the DAG: (i) the Trademark Clearing House, (ii) the Uniform Rapid Suspension System, and (iii) the Rapid Trademark Post-Delegation Dispute Resolution.84 The comment period for the final DAG draft closed on December 10, 2010, and ICANN’s Board at its December meeting in Cartagena, Colombia directed staff to make revisions to the DAG as appropriate based on the comments received during the public comment period.85 Consequently, the first round of gTLD applications is likely to open 79. Government of Puerto Rico Trademark Act, 2009 P.R. Laws 169, §§ 2, 12, 18, 28, 29. 80. Law No. 1075, Junio 28, 2009, DIARIO OFICIAL [D.O.], available at http://www.indecopi.gob.pe/repositorioaps/0/10/par/leg_nornacio/decretolegislativo1075-c.pdf (Peru). 81. See Sistema e-Marcas chega a 72% do total de pedidos [System-Marks and reaches 72% of total orders], Instituto Nacional da Propriedad Industrial, http://www.inpi.gov.br/noticias/sistema-e-marcas-chega-a-72-dototal-de-pedidos (Braz.) (last visited Feb. 6, 2010). 82. See INTERNET CORP. FOR ASSIGNED NAMES AND NOS., http://www.icann.org/en/tlds/select.htm (last visited Dec. 3, 2010). 83. The Proposed Final New gTLD Applicant Guidebook is Available for Public Comment, INTERNET CORP. FOR ASSIGNED NAMES AND NOS., Nov. 12, 2010, http://www.icann.org/en/announcements/announcement-212nov10-en.htm. 84. Id. 85. See Adopted Board Resolutions, INTERNET CORP. FOR ASSIGNED NAMES AND NOS., Dec. 10, 2010, http:/ /www.icann.org/en/minutes/resolutions-10dec10-en.htm#2. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 216 THE INTERNATIONAL LAWYER in May or June of 2011 with new registries to become operational a year later in mid2012. III. Copyright* A. UNITED STATES A U.S. District Court denied a preliminary injunction motion challenging the constitutionality of the Librarian of Congress’ appointment process for the three-judge Copyright Royalty Board (CRB).86 The CRB sets royalty rates for various copyright statutory licenses. The court determined Live365’s argument was not substantially likely to succeed on the merits,87 stating “the Librarian is seemingly a principal officer that heads an Executive Department, and therefore, has the power to appoint inferior officers.”88 The Supreme Court held that copyright registration is not a prerequisite for federal court subject-matter jurisdiction over settlements in copyright infringement claims, stating, “[j]urisdiction refers to a court’s adjudicatory authority.”89 The registration requirement in §411(a) is like a claim-processing rule and not jurisdictional in nature; if Congress does not specifically indicate a certain requirement is jurisdictional, it does not impair the court’s authority to hear such matters.90 Viacom’s long-running copyright infringement suit against Google’s YouTube online video service was dismissed.91 Viacom alleged Google was responsible for the numerous videos posted on YouTube that infringed Viacom’s copyrights in movies and television shows. The court ruled that the safe harbor provision of the Digital Millennium Copyright Act (DMCA) protected Google from liability because Google was not aware of specific instances of copyright infringement and promptly removed videos upon notification that they were infringing copyrights.92 Holding that “mere knowledge of prevalence of such activity in general is not enough,”93 the court distinguished Grokster.94 Grokster’s file-sharing service was secondarily liable for the infringing activities of its users because Grokster effectively supported and promoted infringement, whereas YouTube removed infringing videos promptly upon notice, and Grokster was ineligible for DMCA safe harbor provisions.95 Joining the Fifth and Seventh Circuits, the Ninth Circuit ruled that a copyright registration is effective as of the date the registration application is filed, rather than the date * Copyright Section Editor: Michelle Wynne, Attorney, Seattle, WA; Authors: (United States) Matthew J. Astle, Wiley Rein LLP, Washington, DC; (Switzerland) Daniel Marugg, Carolina Keller and Stephan Feierabend, Gloor & Sieger, Zurich; (Russia) Bruce McDonald, Buchanan, Ingersoll & Rooney, Alexandria, VA. 86. Live365 v. Copyright Royalty Bd., 698 F. Supp. 2d 25, 48 (D.D.C. 2010). 87. Id. at 43. 88. Id. 89. Reed Elsevier, Inc. v. Muchnick, 130 S. Ct. 1237, 1243 (2010). 90. Id. at 1243-45. 91. Viacom Int’l v. YouTube, Inc., 718 F. Supp. 2d 514, 529 (S.D.N.Y. 2010). 92. Id. at 526. 93. Id. at 523. 94. MGM Studios, Inc. v. Grokster, Ltd., 545 U.S. 913, 919 (2005). 95. Viacom Int’l, 718 F. Supp. 2d at 525-26. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTELLECTUAL PROPERTY 217 the registration is issued.96 The case involved alleged infringement of a necklace design. The lawsuit was filed after filing a registration application but before the Copyright Office had issued its approval. Section 411(a) requires a work to be registered before commencement of an infringement suit. The Tenth and Eleventh Circuits have held that the issuance date is the effective date of registration. The split in holdings may require legislation to resolve. The Copyright Office issued new regulations allowing consumers to “jailbreak” their smartphones, a procedure that allows users to install and use programs that have not been approved by the manufacturer.97 Such modification, the Copyright Office found, constitutes fair use. The ruling means that software in iPhones may be altered to allow use of unapproved applications that are not offered for sale in the Apple iTunes Store. The Second Circuit has held that downloading a copy of a musical work does not constitute a “public performance” under the Copyright Act.98 The court drew a distinct line between reproduction and public performance. “Music is neither recited, rendered, nor played when a recording (electronic or otherwise) is simply delivered to a potential listener,” the court stated, distinguishing the separate question of fees payable by Yahoo! and RealNetworks for Internet streaming performances.99 B. CHINA Following 2009’s report from the WTO panel100 finding that Article 4 of China’s Copyright Law101 denied protection to commercial works still being reviewed by China’s censors, the Copyright Law was amended. Now Article 4 reads: “Copyright owners shall neither violate the Constitution and the relevant laws and regulations, nor damage the public interest. The State shall supervise and administer the publication and distribution of copyrighted works in accordance with the law.” An amendment was also made in Article 26 regarding registering copyright pledges. The State Council issued a Notice102 requiring that government agencies at all levels use legitimate software, carry out inspections to ensure that all software is licensed, and that any newly purchased equipment have legitimate pre-installed software. The National Copyright Administration released two new regulations regarding collection of fees for 96. Cosmetic Ideas Inc. v. IAC/InteractiveCorp., 606 F.3d 612, 621 (9th Cir. 2010), cert. denied, IAC/ InteractiveCorp. v. Cosmetic Ideas Inc., No. 10-268, 2010 WL 4811301 (U.S. Nov. 29, 2010). 97. See Exemption to Prohibition on Circumvention of Copyright Protection Systems for Access Control Technologies, 75 Fed. Reg. 43,825 (July 27, 2010) (to be codified at 37 C.F.R. pt. 201). 98. United States v. Am. Soc’y of Composers, Authors, and Publishers, 627 F.3d 64, 68 (2d Cir. 2010). 99. Id. at 73. 100. WTO Issues Panel Report on U.S.-China Dispute Over Intellectual Property Rights, WORLD TRADE ORG., http://www.wto.int/english/news_e/news09_e/362r_e.htm (last visited Feb. 6, 2011). ) [Copyright Law] (promulgated by the Standing Comm. of 101. Zhuzuoquan Fa ( the 7th Nat’l People’s Cong., Sept. 7, 1990, as amended in 2001, art. 4 (China), available at http://news.xinhua net.com/politics/2010-02/26/content_13058016_1.htm. 102. Guowuyuan bangongting guanyu jinyibu zuo hao zhengfujiguan shiyong zheng ban ruanjian gongzuo ) [State Council General Ofde tongzhi ( fice Notice On Further Improving the Work of Government Agencies by Using Legitimate Software] ST. COUNCIL GAZ. (China), available at http://www.gov.cn/zwgk/2010-10/28/content_1732603.htm. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 218 THE INTERNATIONAL LAWYER the use of films provided on the Internet, airplane flights, and public transport.103 It is common for even city buses to have video screens. Presently, the regulations target only Chinese movies. Collection and distribution mechanisms for foreign movies are to be considered at a later date. The China Film Copyright Association104 will start collecting the fees on January 1, 2011, and has called on foreign copyright organizations to discuss ways to collect royalties in co-operation with the Association.105 C. SWITZERLAND The Federal Supreme Court (FSC) issued a decision in the “Guide Orange” case.106 In 1979, Mr. de Siebenthal started working on the “guide orange,” an index of hazardous substances, for the civil service of the City of Geneva. He updated the index in 1985, 1992, and 2003, but it was always published without indication of authorship. When de Siebenthal discovered that Geneva planned to sell the publishing rights, he demanded the publishing rights for himself. The FSC held that: (i) because the guide orange is an index illustrating by means of colors and symbols the hazardousness and characteristics of substances and indicating possible safety measures, it therefore constitutes a work of individual character that is copyright-protected and (ii) because authorship is a personal right, the right to request a declaratory judgment based on the right cannot expire. The Supreme Court of the Canton of Zurich (SCZ) issued a decision on the “Love” case.107 A watch manufacturer integrated a copy of the artist Robert Indiana’s famous “LOVE” motif in clock-faces, except that it replaced the alphabetic character “O” of “LOVE” by a heart shape. The SCZ held that the overall impression of the artwork remained the same. Thus, the clock-faces infringed Robert Indiana’s copyright. 103. Dianying Zuopin Zhuzuoquan Jiti Guanli Shiyongfei Zhuanfu Banfa ( ) [Film Work Collective Copyright Management Use Fee Transfer Payment Rules] (Oct. 14, 2010), http://news.cnfol.com/101014/101,1587,8590850,00.shtml, translated in CHINA COPYRIGHT AND MEDIA BLOG (Oct. 14, 2010, 12:00 AM), Film Work Collective Copyright Management Use Fee Transfer Payment Rules, http://chinacopyrightandmedia.wordpress.com/2010/10/14/film-work-collective-copyright-management-use-fee-transfer-payment-rules/; Dianying Zuopin Zhuzuoquan Jiti Guanli Shiyong Feishouqu Biaozhun [Film Work Copyright Collective Management Use Fee Collection Standards], http://news.sohu.com/20101014/n275644880.shtml, translated in Film Work Copyright Collective Management Use Fee Collection Standards, CHINA COPYRIGHT AND MEDIA BLOG (Oct. 14, 2010, 12:00 AM), http:// chinacopyrightandmedia.wordpress.com/2010/10/14/film-work-copyright-collective-management-use-feecollection-standards/. 104. ZHONGUO DIANYING ZHOUZUOQUAN XIEHUI ( ) [CHINA FILM COPYRIGHT ASS’N], http://www.cfca-c.org/ (last visited Feb. 6, 2011). 105. Qiu Bo & Chen Xin, New Move to Protect Film Copyright, CHINA DAILY, Oct. 15, 2010, http:// www.chinadaily.com.cn/china/2010-10/15/content_11412828.htm. 106. Bundesgericht [BGer] [Federal Supreme Court] Apr. 1, 2010, ENTSCHEIDUNGEN DES SCHWEIZERISCHE BUNDESGERICHTS [BGE] 4A 638/2009 (Switz.). 107. Obergericht des Kantons Zürich [OGer] [Supreme Court of the Canton of Zurich] July 7, 2009, LK060009 (Switz.). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTELLECTUAL PROPERTY D. 219 RUSSIA Russia began the final stage of its seventeen-year quest for WTO accession with enactment of amendments to Part IV of the Civil Code governing intellectual property108 pursuant to the 2006 Bilateral Agreement on Protection and Enforcement of Intellectual Property Rights between Russia and the United States. Copyright owners will receive remuneration for reproduction of phonograms and audio-visual works for personal use. The remuneration will be paid from fees charged to manufacturers and importers of equipment and physical media used for reproduction.109 Although the right was established by the 1993 Copyright Law,110 no implementation occurred until now.111 The resolution contains a list of equipment and physical media on which production/import fees are to be assessed and a procedure for collection and distribution of payments to copyright owners. Amendments to the law on circulation of medicines will protect data submitted by pharmaceutical companies in clinical trials. It forbids generic drug producers from using such data for a period of six years.112 Russian accession to the WTO remains controversial due to concern among copyright owners regarding lack of adequate IP enforcement.113 In its Special 301, the U.S. Trade Representative retained Russia on the Priority Watch list, faulting the country for its continued failure to fight optical disc and Internet piracy, to deter piracy and counterfeiting through enhanced criminal penalties, and to strengthen border enforcement.114 Notwithstanding, there has been significant progress in the struggle against software piracy as a result of the 2008 decision by the Russian Ministry of Education to legalize software in Russian schools, including the government-funded purchase and distribution 108. O VNESENII IZMENENII V CHAST’ CETVERTUUI GRAZHDANSKII KODEKS ROSSIISKOI FEDERATSII [GK RF] [Russian Federal Law Amendments to Part IV of the Civil Code of the Russian Federation] Oct. 4, 2010, No. 782 (Russ.), available at http://www.systema.ru/search.phtml?d1=&d2=04.10.2010&dp=0&ctx=0&ctx_v= &ctx_u=0&sort=0&sp=1&pg=0&Alldoc=. 109. Dmitry Pozharny, KPMG: Remuneration for Reproduction of Media for Personal Use, RUSSIAN LAW ONavailable at http://www.russianlawonline.com/content/kpmg-remuneration-reproduction-media-personal-use. LINE, 110. Zakonodatel’stvo Rossiiskoi Federatsii ob avtorskom lravakh sostoit iz iastoiashchego Zakona [Legislation of the Russian Federation on Copyright and Related Rights that Consist of this Law] July 9, 1993, No. 5351-I (Russ.), available at http://www.systema.ru/search.phtml?d1=&d2=09.07.1993&dp=0&ctx=0&ctx_v=& ctx_u=0&sort=0&sp=1&pg=0&Alldoc=. 111. Postanovlenie Pravitel’stva Rossiiskoi Federatsii O voznagrazhdenii za svobodnoe voslroizvedenie fonogramm I audiovizual’n’ikh lroizvedenii v lichn’ikh cheliakh [Resolution of the Government of the Russian Federation on the Remuneration for the Free Reproduction of Phonograms and Audiovisual Works for Private Purposes] Oct. 14, 2010, No. 829 (Russ.), available at http://www.systema.ru/search.phtml?d1=&d2=14. 10.2010&dp=0&ctx=0&ctx_v=&ctx_u=0&sort=0&sp=1&pg=0&Alldoc=. 112. Pablo Fuchs, Legal Report: Intellectual Property—Drug Wars, CANADIAN LAWYER, available at http:// www.canadianlawyermag.com/Legal-Report-Intellectual-Property-Drug-wars.html. 113. See, Press Release, Int’l Intell. Prop. Alliance, Copyright Industries Urge Greater Global Protection of American Jobs and Exports Threatened by Piracy 122 (Feb. 18, 2010), available at http://www.iipa.com/pdf/ IIPASpecial3012010SubmissionPressReleaseFinal021810.pdf. 114. 2010 Special 301 Report, U.S. TRADE REPRESENTATIVE (2010), http://www.ustr.gov/webfm_send/1906. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 220 THE INTERNATIONAL LAWYER of licensed copies of both Russian and non-Russian software products throughout the country.115 In the news, reports emerged that Microsoft Corporation was complicit in oppressive tactics by the Russian government aimed against non-governmental organizations under the pretext of copyright enforcement. In response, Microsoft announced that it would provide free software licenses to advocacy groups, independent media outlets, and other nonprofit organizations.116 IV. Intellectual Property and Traditional Knowledge* The World Intellectual Property Organization (WIPO) Intergovernmental Committee on Intellectual Property and Genetic Resources, Traditional Knowledge, and Folklore (IGC) continues to work toward establishing a future mandate on the protection of traditional cultural expressions/expressions of folklore, traditional knowledge, and genetic resources. In its Sixteenth Session, the IGC considered draft articles.117 Issues under consideration included scope of protection, management and registration under a sui generis system of protections, and the relationship between protecting traditional expressions and enforcement through international intellectual property systems.118 At the African Regional Intellectual Property Organization (ARIPO) conference in Swakopmund, Namibia,119 nine African countries signed the protocol on Protection of Traditional Knowledge and Expressions of Folklore (ARIPO Protocol).120 According to ARIPO, “implementation of the [ARIPO] Protocol will curtail ongoing misappropriation, bio-piracy, and prevent illicit claim of traditional knowledge-based inventions and patent applications.”121 The Protocol further enables ARIPO to register traditional knowledge/ folklore for protection and enforcement among all ARIPO-signatory nations. In New Zealand, the Patents Bill122 has been amended to establish an indigenous group committee to advise on whether patent applications may be derived from traditional knowledge or from indigenous plants and animals attributed to the Maori indigenous group.123 This revision allows the Maori to determine whether commercial exploitations of patent inventions are likely to be contrary to the group’s values. 115. INT’L INTELLECTUAL PROP. ALLIANCE, RUSSIAN FEDERATION 2010 SPECIAL 301 REPORT ON COPYENFORCEMENT AND PROTECTION 121 (2010). 116. Clifford J. Levy, Microsoft Moves to Help Nonprofits Avoid Piracy-Linked Crackdowns, N.Y. TIMES, Oct. 16, 2010, http://www.nytimes.com/2010/10/17/world/17russia.html. * Section Editor: Melvyn J. Simburg, Seattle, WA; Author: Navine Karim, BET, Inc., Los Angeles, CA. 117. Intergovernmental Committee On Intellectual Property and Genetic Resources, Traditional Knowledge, and Folklore, WORLD INTELL. PROP. ORG., 4 (2010), http://www.wipo.int/edocs/mdocs/tk/en/wipo_grtkf_ic_16/ wipo_grtkf_ic_16_5.pdf. 118. See id. at 28. 119. Swakopmund Protocol on the Protection of Traditional Knowledge and Expressions of Folklore, AFRICAN REG’L INTELL. PROP. ORG., (2010), http://www.aripo.org/images/Swakopmund_Protocol.pdf. 120. ARIPO and Its Member States Adopt a New Protocol on TK, AFRICAN REG’L INTELL. PROP. ORG., (Sept. 13, 2010), http://www.aripo.org/index.php?option=com _ content&view = article&id=108:adoptionoftk protocol&catid=1:latest-news&Itemid=18. 121. See id. 122. Patent’s Bill 2008 (N.Z.), available at http://www.parliament.nz/en-NZ/PB/Legislation/Bills/BillsDigests/a/3/2/49PLLawBD16741-Patents-Bill-2008-Bills-Digest-No-1674.htm. 123. Id. RIGHT VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW INTELLECTUAL PROPERTY 221 The Commerce Department of the United States Patent and Trademark Office (PTO) signed an access agreement with the Government of India, thereby granting the U.S. PTO access to the Traditional Knowledge Digital Library (TKDL).124 U.S. patent access will prevent misappropriation of traditional knowledge by U.S. patent applicants. Similar access arrangements exist for the EPO and U.K. PTO.125 The Intellectual Property Laws Amendment Bill in South Africa126 seeks to preserve expression of traditional knowledge and folklore through amendments to the Performers Protection Act, the Copyright Act, Trademarks Act, and Designs Act. The bill establishes new forms of intellectual property that include “traditional copyright,” “traditional designs,” and “traditional performances.” In order to receive protection under the bill, the new forms of intellectual property must be recognized by the indigenous community as having an indigenous origin. Under the bill, patent applicants are required to disclose whether an application is: “directly derived from an indigenous biological resource or a genetic resource; and based on or derived from traditional knowledge or traditional use.”127 A patent application cannot be refused on the basis of nondisclosure or wrongful disclosure, but it might not meet the criteria for patenting, i.e., be new, no prior art, no obviousness, have an inventive step, and have novelty.128 SIPO (Patent Office) passed a government-level statute known as the Guizhou Provincial Regulation on Traditional Knowledge Protection.129 This regulation applies intellectual property protections for custodians of traditional knowledge in the Guizhou region of China. Also, the new patent law in China includes additional provisions related to protection of traditional knowledge. Article 5(2) states that “no patent right shall be granted for any invention/creation that relies on genetic resources accessed or used in violation of the provisions of relevant laws or administrative regulations.” Article 26(5) states that “for inventions/creations that rely on genetic resources, the patent applicant shall disclose in the application the direct source and the original source of the genetic resources, and shall, where the applicant fails to disclose the original source, provide a reason for such a failure.”130 124. Press Release, Gov’t of India, India Partners with U.S. and U.K. to Protect Its Traditional Knowledge and Prevent Biopiracy (Nov. 9, 2009), available at http://www.tkdl.res.in/tkdl/PressRelease/TKDL_Press_statement.pdf. 125. See id. 126. Policy Framework for the Protection of Indigenous Traditional Knowledge Through the Intellectual Property System and the Intellectual Property Laws Amendment Bill, 2008, Bill 31026 (GN) (S. Afr.), available at http://www.info.gov.za/view/DownloadFileAction?id=81111. 127. Patents Amendment Bill, 2005, Bill No. 27529 (GN) (S. Afr.), available at http://www.info.gov.za/view/ DownloadFileAction?id=66029. 128. Id. 129. See Province Crafts New Law to Protect Traditional Arts, Medicine, CHINA CULTURAL INDUS., Dec. 25, 2007, http://en.cnci.gov.cn/HtmlFiles/News/2007-12-25/3579.html. 130. Intergovernmental Committee On Intellectual Property and Genetic Resources, Traditional Knowledge, and Folklore, ANNEX WORLD INTELL. PROP. ORG., 2 (2010), http://www.wipo.int/edocs/mdocs/tk/en/wipo_grtkf _ic_16/wipo_grtkf_ic_16_inf_27.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Financial Products and Services* EDITED BY: AUTHORED LENNAERT POSCH BY: AND LLOYD WINANS DWIGHT SMITH, JOSEPH YESUTIS, LLOYD WINANS, CHRISTINA LAVERA, LENNAERT POSCH, MICHIEL COENRAADS, MATTIA COLONNELLI GASPERIS, FRANCESCA CANZANI, WALTER STUBER, DE AND ADRIANA MARIA GÖDEL STUBER This year’s review article addresses two of the most significant financial legislative developments in the United States and Europe in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Directive on Alternative Investment Fund Managers, respectively. It furthermore gives insights into specific, material developments in the legislation of Italy and Brazil during 2010. I. Developments in the United States* A. THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT On July 21, 2010, the most sweeping banking legislation in a decade was signed into law as the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Act”). With a stroke of a pen, all types of financial institutions became subject to significant new conditions and limitations; nonfinancial, publicly traded companies received new obligations as well. As is always the case with landmark legislation, the consequences on day-to-day operations will emerge over time, as regulators begin their analysis and rulemaking. The legislation is designed to advance several policies that had been observed, at best, in theory rather than practice, and is in some ways a reaction to the popular belief that the financial crisis of the last few years can be traced to regulatory failure. In broad terms, each policy is embodied in one or more specific titles: • Identification of institutions and activities that pose systemic risk to the U.S. economy and the proper management of these risks—hence the creation of the Financial Services Oversight Council (“FSOC”) (Title I). * Editors: Lennaert Posch and Lloyd Winans, co-chairs of the International Financial Products and Services Committee. * Contributed by Dwight Smith, Partner, Morrison & Foerster, LLP; Lloyd Winans, Partner, Alston & Bird LLP; and Joseph Yesutis and Christina LaVera, Counsel, Alston & Bird LLP. 223 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 224 THE INTERNATIONAL LAWYER • The end of the “too-big-to-fail” doctrine and the creation of a mechanism to handle the failure of systemically significant new institutions—thus new orderly liquidation authority for the Federal Deposit Insurance Corporation (“FDIC”) (Title II) and changes to the emergency powers of the Federal Reserve Board (“FRB”) and the FDIC (Title XI). • Regulation of the shadow financial services industry, with respect both to institutions that take on or transfer risk—as a result, new regulation for private equity and hedge funds (Title IV) and participants in the structured finance market (Title IX). • Transparency of complex financial instruments designed to transfer risk—accordingly, the restructuring of the derivatives market (Title VII). • Effective protection of home loan borrowers and other consumers against abusive and deceptive practices—thus, the creation of the Bureau of Consumer Financial Protection (“BCFP”) (Title X) and enhanced regulation of the residential mortgage industry (Title XIV), and the inclusion of the Durbin Amendment which requires interchange transaction fees on electronic debit transactions to be “reasonable and proportional” to the incremental costs to the issuer with respect to the transaction. • Effective protection of retail investors—as a result, enhanced regulation of broker dealers and investment advisers (Title IX). • Appropriate safety and soundness regulation of all institutions that control insured depository institutions—hence new substantive regulation (Title VI) and changes in supervisory authority (Title III). • Other concerns—several other titles address financial institutions or activities whose links to the financial crisis are less clear, but that may pose great risks in the future: insurance companies (Title V) and payment, clearing, and settlement services (Title VIII). The new rules and regulations, even though they may be a long time in coming in final form, require immediate attention by financial institutions for two reasons: First, the impact of any new requirements will be dramatic and in many cases will result in material changes to how capital should be allocated across all business lines and how each business line should be managed. Second, economic events could force action before the nominal deadlines in the Act. The economy remains fragile, and credit risk at the retail level is still significant. If there are adverse future developments, these will not wait for the Act to take full effect, and substantive regulation along the lines of the legislation could come into play sooner than expected. In some ways, the federal regulators already possess the power to implement the new obligations and duties contemplated by the Act. As part of compliance planning, there are three overlapping perspectives to keep in mind: • Regulatory Structure. The Act creates, among other things, two important agencies—the FSOC and the BCFP. Both are likely to make decisions that will affect institutions even outside of what is commonly perceived to be their jurisdiction. Additionally, the FRB will gain sweeping new supervisory authority. The powers of the other major federal financial services industry, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the FDIC and the Office of the Comptroller of the Currency (OCC) will expand in significant ways as VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FINANCIAL PRODUCTS & SERVICES 225 well. The one nominal regulatory reduction is the abolition of the Office of Thrift Supervision, although its powers and responsibilities will be folded into the OCC. • Institutions. All but the smallest depository institutions will see changes in regulation that will depend in significant part on structure and charter. Substantial supervisory changes are in store for bank holding companies with nonbank subsidiaries; the FRB now has far greater authority over these subsidiaries. Of course, large nonbank financial companies should plan for the new relationship with the FSOC. With respect to charters, federal savings associations may need to re-think their charter choice (although the charter is not abolished), and companies with nonbank banks could (but are not certain to) face new regulation. • Operations and Activities. The Act creates significant new restrictions for nearly all activities of financial institutions, both internal and external, and both wholesale and retail. While the vast majority of financial institutions will not themselves be deemed systemically significant, they may well engage in activities that the FSOC believes present systemic risk. Greatly enhanced regulation by the FRB could be the result. There are potentially critical changes for specific businesses as well. For example, all participants at any stage of the residential mortgage business will have new duties. The terms of certain mortgage loans are certain to change, which will have a ripple effect throughout the mortgage industry. As another example, the legislation, as is widely known and appreciated, effectively forces the reorganization of the market for over-the-counter derivatives; less publicized are new limits on the use of derivatives within a banking organization. Until the regulations for each title are drafted and implemented, which is expected during the course of 2011, some uncertainty will remain as to the extent of changes to product offerings, processes, disclosures, and risk management practices. The history of banking law in the United States is dynamic and has been so since the country’s inception. The Act is yet another sweeping revision that attempts to ensure the safety of the economic lifeblood of America. II. Developments in the European Union (E.U.)* A. EUROPEAN DIRECTIVE ON ALTERNATIVE INVESTMENT FUND MANAGERS 1. Introduction On November 11, 2010,1 the European Parliament adopted the Directive on Alternative Investment Fund Managers (“AIFM”S), setting forth rules regulating the activities of AIFMs.2 This Directive is certain to have a serious impact on the way E.U. funds are * Contributed by Lennaert Posch and Michiel Coenraads of Stibbe (Amsterdam, the Netherlands), following up on and updating their article in the International Financial Products and Services Committee newsletter of August 2009. 1. Press Release, European Commission Statement at the occasion of the European Parliament vote on the directive on hedge funds and private equity (Nov. 11, 2010), available at http://europa.eu/rapid/press ReleasesAction.do?reference=MEMO/10/573&format=HTML&aged=0&language=EN&guiLanguage=en. 2. Commission Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund Managers and Amending Directives 2003/41/EC and 2009/65/EC, COM (2009) 207 final (Oct. 27, 2010) [hereinafter Directive of the European Parliament and of the Council], available at http://www. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 226 THE INTERNATIONAL LAWYER managed, and on the management and marketing of non-E.U. funds in the E.U. Consequently, prior to its adoption, the Directive has, from the first draft of April 2009, encountered severe concerns from various interest groups. According to the European Commission, which initially proposed the Directive, the global financial crisis has exposed a series of vulnerabilities in the global financial system and revealed that AIFMs, as significant actors in the financial system, can cause significant risks. These risks exist not only for investors in AIFM-managed funds, but also for investors’ creditors, for the companies that form part of the funds’ investment portfolios, and even for the financial system at large. The Directive regulates the managers of alternative investment funds (hereinafter also “AIF”s), rather than directly managing the funds themselves. Under the Directive, a comprehensive, harmonized E.U. framework for prudential oversight and the supervision of AIFMs is created. In addition, the new European Securities Market Authority (“ESMA”) will be granted certain powers to intervene in the management of AIFs. On the other hand, granting AIFMs passport rights, thereby enabling them to provide their services and market the funds across the internal market of the E.U., creates a level playing field. 2. Scope: Not Only European, But Global Impact The Directive applies to all AIFMs located in the E.U. and to AIFMs located outside the E.U. that manage E.U. AIFs or that market AIFs into the E.U. Generally, the following exemptions apply: AIFMs that manage funds with an aggregate asset portfolio of less than =C100 million are exempted from the authorization requirement. AIFMs with assets under management of less than =C500 million are exempted as well, but only if those AIFs are not leveraged (there can exist leverage at the portfolio company level though) and if they do not offer redemption rights for the investors during five years after the inception of the fund. To these smaller managers, a lighter “registration only”-regime applies. They are however given the opportunity to ‘opt-in’ so as to avail themselves of passporting rights, in which case these smaller funds must also fully comply with the Directive. Certain specific entities, such as holding companies, central banks, pension funds investing their own money or securitization special purpose entities, do not fall within the scope of the Directive. It is remarkable that the scope is so broad that the Directive catches not only hedge funds and private equity firms, but also other types of collective investment vehicles, such as commodity funds or closed end listed investment companies. On the other hand, vehicles that are not structured as a fund (but for example as managed accounts, such as Bernard Madoff’s investment company) are not covered by the Directive.3 3. Authorization a. Authorization Process A starting point of the Directive is that each member state of the E.U. must ensure that no AIFM acts as a manager or promotes any fund without prior authorization in accorevca.eu/uploadedFiles/Home/Public_And_Regulatory_Affairs/AIFM_Directive/AIFMD_Proposal_Text_27 1010.pdf. 3. Id. arts. 2 ¶¶ 1-2, 3 ¶ 1. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FINANCIAL PRODUCTS & SERVICES 227 dance with the Directive.4 The procedure for obtaining authorization includes providing a wide range of information to the member state’s authority, including (i) details on the shareholders/members of the AIFM and its structure; (ii) details on its remuneration policies; (iii) the terms (or rules) and the instruments of incorporation of each fund that the AIFM intends to manage; as well as (iv) the information that the AIFM is required to give to the fund’s prospective investors.5 The authority must decide within three months (extendable on a case-by-case basis to six months) after the application has been submitted and can approve, approve with restrictions, or reject the application. ESMA will maintain a central public register of all AIFMs and all AIFs that may be marketed in the E.U. b. Initial Capital and Own Funds = 300,000 for selfThere is a minimum own funds requirement for AIFMs of =C125,000 (C managed funds), but additional capital (subject to a cap) will be required if the assets of the fund under management exceed =C250 million. This aims to ensure the continuity and regularity of the AIFMs’ work. AIFMs must also have adequate funds to cover professional liability risks or have adequate insurance for these risks.6 4. Requirements As set out above, the Directive does not aim to regulate the funds themselves, but merely the AIFMs managing the funds. Also, it does not regulate the investment strategies that the AIFMs use. The requirements provided by the Directive concern the conduct of business, the organization of the AIFM, and the remuneration of its staff. In addition, the Directive aims to increase transparency by imposing wide-reaching disclosure and reporting requirements. a. Conduct of Business (1) General The Directive provides both general principles and specific rules for the way AIFMs must conduct their business. In terms of general principles, the AIFMs must, inter alia: (i) act honestly, with due skill, care and diligence and fairly; (ii) act in the best interest of their AIF, their investors, and the integrity of the market as a whole; (iii) ensure that all their investors are treated fairly; and (iv) prevent any conflicts of interest.7 (2) Remuneration The Directive contains detailed remuneration rules (also encompassing carried interest) that are in large part based on the Financial Stability Board and G20 standards. The Directive will require AIFMs to (i) implement remuneration policies and practices that promote sound and effective risk management and do not encourage undue risk-taking; 4. 5. 6. 7. Id. Id. Id. Id. arts. 6 ¶ 1, 7 ¶ 1. art. 7. art. 9. art. 12 ¶ 1. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 228 THE INTERNATIONAL LAWYER and (ii) apply detailed rules in respect of the ways they compensate their (senior) employees (e.g., deferment of bonus payments).8 (3) Risk management The Directive makes a clear distinction between (i) risk management and (ii) portfolio management, and determines that those functions must be separately operated (and thus be subject to separate reviews). The risk management systems must measure, manage, and monitor all risks associated with each investment strategy and each fund. Also, each time the fund makes an investment, it must follow a (written and regularly updated) due diligence process. It must provide insight in the risks and impact thereof on each fund’s portfolio, and ensure that the risk profile corresponds to the fund’s applicable terms. Also, risk management systems must enable the funds to be stress-tested. For each AIF, a maximum level of leverage shall be set by the AIFM, as well as the extent of the potential (reuse) of collateral or guarantee to be granted in respect thereof.9 (4) Liquidity management Pursuant to the Directive, the AIFM must have an adequate liquidity management system in order to ensure that the liquidity profile of the portfolio corresponds with the underlying obligations. The investment strategy, the liquidity profile, and the redemption policy must be consistent. Also, in this respect the AIFM must regularly conduct stress tests.10 These rules must prevent the problems we have seen during the recent financial crisis where large-scale redemption requests were made. Funds were not able to meet these requests, and thus, had to disinvest, which may have had an impact on the financial system at large. (5) Investments in securitized loans The European Commission is required to adopt specific measures setting out requirements for the originator, sponsor, and the original lender in order for an AIFM to be allowed to invest in securities of this type on behalf of an AIF.11 b. Organizational (1) General The Directive provides both general principles and specific rules for the way AIFMs are organized.12 In terms of general principles, the AIFMs must have: (i) adequate and appropriate resources that are necessary for the proper performance of its management activities; and (ii) updated systems, documented internal procedures, and regular internal controls of the conduct of its business in order to mitigate and manage risks. The European Commission believes that the risks (both for investors and for the financial system at large) associated with funds stem from not only the AIFM, but also from the other key actors in the fund structure: the valuer and the depositary. Consequently, the Directive focuses on these entities as well. 8. 9. 10. 11. 12. Id. Id. Id. Id. Id. art. 13 ¶ 1, Annex II. art. 15. art. 16. art. 17. arts. 18, 19, 20 ¶ 1. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FINANCIAL PRODUCTS & SERVICES 229 (2) Valuation The net asset value per share or unit of an AIF must be valued once a year. For openended funds, additional calculations need to be made at appropriate times, given a fund’s issuance and redemption frequency. For closed-ended funds, additional calculations must be made whenever there is an increase or decrease in capital. Such valuation must be performed by the AIFM itself (in a way that is functionally independent from portfolio management and the setting of remuneration policy) or by an external valuer (subject to professional registration or similar credentials and able to furnish professional guarantees). The rules regarding delegation (see below) also apply to a valuation by an external valuer.13 (3) Delegation AIFMs that intend to delegate part of their functions to other parties need to notify the authority before effecting such an arrangement and comply with certain conditions, such as, inter alia: (i) being able to provide a justification for the delegation; (ii) the delegatee having sufficient resources and staff as well as a good repute and sufficient experience; (iii) the delegatee being authorized or registered and supervised as a manager (if the delegation concerns management functions); (iv) the AIFM being able to monitor the delegation, give instructions to the delegatee, and cancel the delegation with immediate effect, if in the interest of the AIF’s investors; (v) the delegation not preventing the AIFM from acting in the best interests of investors; and (vi) the delegation not preventing oversight by the AIFM’s regulators.14 Delegation of management functions may not be made to an AIF’s depositary or other entity whose interests may conflict with the AIFM or the investors of the AIF (unless measures have been taken to adequately address such conflict of interest). Delegation of portfolio-or risk-management functions to a non-E.U. country can only be permitted if co-operation between the AIFM’s regulator and the regulator of the nonE.U. country is ensured. Furthermore, the AIFM’s liability to a fund and its investors is not affected by any delegation. In other words, the AIFM is responsible for acts and omissions of the delegatee. (4) Depositaries The Directive also aims to ensure that the party that actually takes custody of the money and assets of an AIF (except for non-E.U. AIFs that are not marketed in the E.U.) is under E.U. regulation as well. Under the Directive, (i) an independent E.U. credit institution (bank); (ii) another E.U. regulated entity authorized to provide custodial services and meeting certain capital requirements; or (iii) an entity that is regulated and authorized to act as depositary under the UCITS (Undertakings for Collective Investment in Transferable Securities) Directive, must be engaged as depositary of the funds’ assets. For non-E.U. AIFs, the depositary may be a bank or other custodian located outside the E.U., provided it is regulated in a way that is equivalent to E.U. law and that is effectively enforced.15 The Directive provides for further rules concerning the location of the depositary and the functions it is required to perform, as well as the depositary’s liability vis-à-vis the AIF and its investors, which in most cases, is near strict. This means that the depositary is 13. Id. art. 19 ¶¶ 3-5. 14. Id. art. 20 ¶¶ 1-3. 15. Id. art. 21. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 230 THE INTERNATIONAL LAWYER liable for (i) a loss of assets under its custody, unless it can prove that the loss was caused by “an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary;”16 and (ii) losses suffered by the AIF or its investors caused by its negligence or intentional failure to comply with the Directive. Delegation of the custody functions by a depository is only possible in observance of strict rules. 5. Disclosures and Reporting The Directive contains rules regarding the AIFMs’ transparency to investors, regulators, and others. The AIFM must produce an annual report for each fund that it manages and make that available to the investors and the regulators. Also, the AIFM must submit certain specified information to the regulators (regarding liquidity, leverage, and the principal exposures and concentrations of the fund) and to prospective investors before they invest. Furthermore, there are ongoing disclosure requirements to investors regarding leverage (on a regular basis), on liquidity and risk management (periodically), and with respect to material changes to any information previously provided.17 The Directive provides further rules for the required disclosures by specific funds: (i) funds using leverage on a substantial basis and (ii) funds that acquire major stakes in companies. a. Leverage AIFMs that manage funds that are leveraged (on a substantial basis) must make certain additional disclosures to regulators.18 The Directive itself does not impose any flat limits on leverage, though. But, the AIFM is required to set the limits for each fund it manages, demonstrate compliance with those limits, and demonstrate that they are reasonable. The E.U. member states will have the power (but not the obligation) to set further limits in exceptional cases, in order to ensure the stability of the financial system. Note that only leverage at the fund level, and not at the portfolio level, is taken into account. b. Significant Stakes The Directive imposes a notification obligation to the regulator whenever the voting rights held by an AIF reach, exceed, or fall below the thresholds of ten percent, twenty percent, thirty percent, fifty percent, and seventy-five percent of a company, listed or unlisted.19 If an AIFM acquires a controlling interest in a listed company or a large unlisted company (which in the latter case means that it becomes able to exercise fifty percent or more of the voting rights), specific requirements apply. The AIFM must in such a case inform the company and the other shareholders of the company of (i) the fund’s identity; (ii) the fund’s development plan for the company; (iii) the fund’s policy to deal with conflicts between the fund and the company, and (iv) the fund’s communication pol16. 17. 18. 19. Id. Id. Id. Id. art. 21 ¶¶ 5, 11, 13, 15. arts. 22 ¶¶ 1-2, 23 ¶¶ 1-2. art. 25 ¶¶ 1-3. arts. 26 ¶ 5, 27 ¶ 1. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FINANCIAL PRODUCTS & SERVICES 231 icy.20 If the investment concerns an unlisted company, the AIFM must provide additional information, such as its intentions as to the future business of the company, including consequences for employees, and in its annual report for the relevant AIF, the company’s likely future development.21 6. Asset Stripping At the insistence of certain members of the E.U. Parliament, the final text of the Directive contains provisions to prevent “asset stripping” where an AIF (individually or jointly) acquires control of a company. The provisions apply for a period of two years following such acquisition. The AIFM of the relevant AIF is, during this period, not allowed to facilitate or support (by vote or otherwise) certain distributions, capital reductions, and share redemptions where this would lead to a greater distribution than is justified by the company’s profits or where the effect would reduce net assets below subscribed capital and reserves that may not be distributed.22 7. Passport Rights and Third Country Issues An authorized E.U. AIFM may manage and market (units in) an E.U. AIF to professional investors within its home state. The passport right, to be in place from January 2013, entails that an authorized AIFM may market the E.U. funds it manages to professional investors in each E.U. member state.23 The only requirement to market in an E.U. member state other than the AIFM’s home state is that it must first notify its home state regulator, who must forward the information to the host state regulator. The Directive also provides a passport right to provide management services throughout the E.U., either on a cross border basis or via the establishment of a branch. Again, the AIFM must notify the home state regulator of its pan-European aspirations. The most controversial aspect of the Directive was the treatment of third country (nonE.U.) managers and funds. In the end, it now seems likely that the issue has been resolved in favor of granting non-E.U. funds a form of passport. But, this will be delayed until 2015.24 In the final text of the Directive, different marketing rules are provided for (i) E.U. AIFMs managing non-E.U. AIFs; (ii) non-E.U. AIFMs managing E.U. AIFs; and (iii) non-E.U. AIFMs managing non-E.U. AIFs. With respect to (i), E.U. AIFMs are allowed to manage non-E.U. AIFs but for certain provisions relating to depositaries and the annual report must fully comply with the Directive. Furthermore, additional requirements apply, such as the existence of adequate cooperation agreements between the regulator of the AIFM’s home state and the regulator of the country where the AIF is established.25 As to marketing, as stated above, until 2015 there will not be a passport, but E.U. AIFMs are allowed to market non-E.U. AIFs to professional investors under individual member states’ private placement regimes, provided (1) that the AIFM complies with the 20. 21. 22. 23. 24. 25. Id. Id. Id. Id. Id. Id. art. 28 ¶ 1. art. 29 ¶¶ 1-2. art. 30 ¶ 1. arts. 32 ¶¶ 1-3, 33 ¶¶ 1-2, 4. art. 63 bis ¶ 1. art. 34. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 232 THE INTERNATIONAL LAWYER Directive and (2) that the jurisdiction where the non-E.U. AIF is established is not determined to be a Non-Cooperative Country and Territory by the Financial Action Task Force on anti-money laundering and terrorist financing (an “NCC”).26 It is likely that, in the course of 2015, a marketing passport for non-E.U. AIFs will become available provided that the above requirements are met and there is also a tax sharing information agreement in place between the state where the relevant AIF is established and the home member state of the AIFM as well as the other member states into which marketing is to take place.27 Non-E.U. AIFMs that intend to manage E.U. AIFs need an authorization from the member state in which the AIF is established (the “member state of reference”).28 This can be done cross-border or by the establishment of a branch office in the member state of reference (a minimal presence needs to be established). Duly authorized non-E.U. AIFMs can market E.U. AIFs under the future passport regime provided they comply with the Directive and that notification is made to the regulator of each member state in which it intends to market.29 A duly authorized non-E.U. AIFM will, from 2015 on, be allowed to market units in a non-E.U. AIF to professional investors under the passport regime subject to, inter alia, the following requirements: (a) compliance with the Directive; (b) notifications to the regulators of member states into which it will market; (c) the existence of cooperation agreements between the regulators; and (d) the jurisdiction of the AIF is not an NCC.30 Non-E.U. AIFMs will be allowed (until 2018) to market units in an E.U. or non-E.U. AIF under the national private placement regime of individual member states. They must, however, in that case also comply with a number of additional requirements which, broadly, are the following: (a) compliance with provisions of the Directive regarding the annual report; disclosure and reporting; (b) if applicable, compliance with the provisions on the disclosure of control and asset stripping; (c) compliance with appropriate cooperation agreements between the relevant regulators; and (d) demonstration that the jurisdiction of establishment of the non-AIF is not an NCC.31 8. Retail Investors Member states may also permit the marketing of units in a fund to retail investors, if they so wish. In such a case they may also impose stricter requirements on the AIFM or the AIF in question than are set forth in the Directive in respect of the marketing to professional investors.32 9. ESMA ESMA may, under certain conditions and in certain circumstances, require that the regulator of a member state take any of the following actions: (i) a prohibition on market26. 27. 28. 29. 30. 31. 32. Id. Id. Id. Id. Id. Id. Id. art. art. art. art. art. art. art. 36 ¶ 1. 35 ¶ 2(c). 37 ¶ 1. 38 ¶¶ 1-2. 39. 40 ¶ 1. 41. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FINANCIAL PRODUCTS & SERVICES 233 ing shares or units in E.U. AIFs that are managed by non-E.U. AIFMs or in non-E.U. AIFs that are managed by E.U. AIFMs; (ii) impose restrictions on non-E.U. AIFMs in respect to the management of an AIF where excessive risk is concentrated in a specific market on a cross border basis; and (iii) impose restrictions on non-E.U. AIFMs relating to the management of an AIF where their activities pose an important counterparty risk to a credit institution or other systemically important institutions.33 10. Concerns In The Market Many lobbyists and interest groups have, during the legislative process, expressed their views on the Directive. For obvious reasons, many of them welcome the passport rights granted to AIFMs to market funds and provide services across the internal market of the E.U., but oppose the other side of the medal. Generally, the interest groups believe that the new rules impose significant administrative burdens and costs while they do not create significant additional value for investors. The Alternative Investment Management Association (“AIMA”) has argued that hedge funds have neither caused nor played a significant role in the financial crisis and that hence it is unfair to confront them with more rules and supervision.34 Although they have over time, as the draft text developed, significantly softened their stance towards the Directive, they remain concerned about the compliance burden and regret the potential abolition of private placement regimes which, in their view, worked well.35 Many investors also point out that the costs of compliance will, in the end of the day, have to be borne by the investors.36 11. Further Steps The final text is yet to be adopted by the Council. Following translation into all official E.U. languages, the Directive will be published in the Official Journal. The Directive will come into force in early 2011 and must be implemented by member states in the beginning of 2013. From that time on, there will be a passport for E.U. AIFMs marketing E.U. AIFs. For non-E.U. AIFMs and managers of non-E.U. AIFs, the national private placement regime will (continue to) apply. As from the beginning of 2015, it is likely that the passporting regime will become available in parallel with the national private placement regimes. From 2018, the private placement regimes may be abolished, leaving the passport regime in place. On practically every subject that the Directive addresses, the European Commission must produce additional “level 2” rules. The Directive is very detailed in some respects but is also still unclear in many others. Hopefully, “level 2” will provide more certainty as to its practical, everyday impact. 33. Id. art. 45, ¶ 4(a)-(c). 34. See Florence Lombardo, AIMA Statement on European Commission Directive, AIMA, Apr. 23, 2009, http:/ /www.aima.org/en/announcements/aima-statement-on-european-commission-directive.cfm. 35. See Andrew Baker, AIMA Statement on AIFMD, AIMA, Oct. 19, 2010, http://www.aima.org/en/announcements/aima-statement-on-aifmd.cfm. 36. See, e.g., Letter from Johcarlo R. Mark, Institutional Ltd. Partners Ass’n Chairman, to Jean Paul Gauzès, Rapporteur for the AIFM Directive (Mar. 8, 2010), available at http://www.ft.com/cms/ed7c1252-2b 98-11df-a5c7-00144feabdc0.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 234 THE INTERNATIONAL LAWYER 12. Conclusion On the one hand, the Directive will increase the level playing field for AIFMs across the internal market of the E.U., whereas on the other hand supervision (on both micro- and macro-prudential levels) will be materially increased. This will also increase the administrative burden, both for the AIFMs as for the regulators. The exclusion of offshore funds of the passport rights, at least for the first two years after the Directive coming into effect, gives somewhat of a head start to their European competitors. III. Developments in Italy* A. INVESTMENT FUNDS On May 31, 2010, the Government of Italy issued Law Decree no. 78 on “Urgent action on financial stabilization and economic competitiveness,”37 converted to Law no. 122 of July 30, 2010.38 Article 32 of such Law Decree,39 while providing for the reorganization of the tax rules of real estate close-end funds (the immediate intention of this provision is to stem the use and setting up of real estate close-end funds only to take advantage of certain tax benefits40 applicable to those funds), introduces key amendments to the regulation of all types of investment funds in order to protect the investors, enhance the flexibility of the investment funds, and render them more competitive in the international arena. Technically, such objectives have been achieved, inter alia, through the following amendments to the Italian Consolidated Law on Financial Intermediation (“TUF”).41 First, the definition of “investment funds” has been amended and clarified by specifying the economic function and the features of the funds. According to the new provision,42 investment funds mean equity raised independently through the issue of one or more fund units among a number of investors, with the aim of investing the equity raised in accordance with a pre-established investment policy; divided into units pertaining to a given number of investors; managed upstream in the interests of the investors and fully independent of those investors. Second, to enhance the protection of the unit holders and attract more domestic and foreign investments, it has further specified the separation of the assets/obligations of a certain fund vis-à-vis the assets/obligations of other funds managed by the same investment company. In this regard, article 36, subsection 6 of TUF has been amended by * Developments in Italy was contributed by Mattia Colonnelli de Gasperis and Francesca Canzani of Colonnelli de Gasperis Studio Legale in Milan, Italy ([email protected]), which provides legal advice on financial products and services in Italy. 37. Decreto Legge 31 maggio 2010, n. 78, in G.U. 30 luglio 2010, n. 176 (It.), available at http://www.alta lex.com/index.php?idnot=11219. 38. Legge 30 luglio 2010, n. 122, in G.U. 30 luglio 2010, n. 176 (It.), available at http://www.urp.it/allegati/ Legge_2010_122.pdf. 39. Commission Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund Managers and Amending Directives 2003/41/EC and 2009/65/EC, supra note 2, art. 32. 40. See Decreto Legge 25 settembre 2001, n. 351, converted to Legge 23 novembre 2001, n. 410, in G.U. 24 novembre 2001, n. 274 (It.), available at http://www.parlamento.it/parlam/leggi/01410l.htm. 41. Decreto Legislativo 24 febbraio 1998, n. 58, in G.U. 26 marzo 1998, n. 71 (It.). 42. Id. art. 1 § 1(j). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FINANCIAL PRODUCTS & SERVICES 235 stating the fund is liable exclusively with its own assets in relation to the obligations undertaken for the fund’s own account. Due to certain technicalities, that modification, among other things, increases the leverage that can be used by each fund. Third, new article 37, subsection 2(b) of TUF sensibly limits the regulatory supervision of the Bank of Italy on the so called “reserved funds,” which are funds reserved only to “qualified investors” (mostly, institutional investors). In particular, the rules of these funds are no longer subject to the prior approval of the Bank of Italy, neither same rules (i) are subject to certain drafting criteria and (ii) have to contain a certain minimum content (drafting criteria and minimum content which still apply to the “ordinary funds” (i.e. not reserved funds)). Such radical deregulation enhances flexibility and promotes efficiency of the system by reducing compliance costs and fees to be paid to the fund manager. That simplification aligns Italy with the applicable laws and regulations of other countries. At the same time, the elimination of the prior approval of the fund rules by the Bank of Italy increases the responsibility of the industry players. Given the high degree of technicality of the subject matter, the Italian Ministry of Economy and Finance is in charge of issuing a decree implementing in details the described amendments.43 This decree has not yet been enacted, but a draft of the decree has already been prepared and likely will be circulated for public consultation. Judging from the draft of the decree, there are many things to come, and not all related solely to the implementation of the mentioned amendments.44 For instance, new rules will probably be introduced (i) to draw a clearer line between “harmonized funds” and “alternative funds,” as defined by the E.U. regulations and directives; (ii) to extend the maximum term of close-end funds up to fifty years; (iii) to enlarge the eligible assets of the real estate funds; and (iv) to extend the period of initial contributions of close-end funds up to twenty-four months. IV. Developments in Brazil A. THE USE IN OF THE IOF TAX TO REGULATE THE INFLOW OF FOREIGN CURRENCY BRAZIL* The tax on credit and exchange transactions, insurance and securities (Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Tı́tulos ou Valores Mobiliários-IOF) in Brazil is assessed on the amount of bank loans and similar transactions, on the amount of foreign currency purchased or sold, and on insurance premiums and the price of securities purchased or sold. The applicable tax rate may vary from zero to twenty-five percent and depends on the kind of operation. The IOF is a regulatory tax and the rates are decreased or increased by the Brazilian government whenever the authorities decide to foster or reduce the inflow of foreign currency funds into the country. 43. L. n. 122/2010 (It.). 44. Per I Fondi Immobiliari “Alternativi” Non Sarà Più Necessario L’ok di Bankitalia [Bank of Italy approval no longer required for “alternative” real estate funds], IL SOLE 24 ORE, Nov. 11, 2010, http://www.ilsole24ore. com/art/norme-e-tributi/2010-11-10/fondi-immobiliari-alternativi-sara-222524.shtml?uuid=AYUqDiiC. * By Walter Stuber and Adriana Maria Gödel Stuber, of Walter Stuber Consultoria Jurı́dica (São Paulo, Brazil). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 236 THE INTERNATIONAL LAWYER Interest rates in Brazil are higher than those prevailing in the international market, and this difference represents an opportunity for making additional gains and thereby attracting foreign investors. Therefore, the IOF rate affects the effective cost and reduces the profitability of the transaction. Like many other countries, Brazil decided to take a series of measures aimed to reduce the entry of foreign currency funds for short-term investments, which is considered speculative capital, not desired by the Brazilian government. The Brazilian Finance Minister, Guido Mantega, claimed that “international currency war” had broken out and argued that the increase of the IOF rate was an important measure to defend the value of the Brazilian currency (Real) in this war. In October 2010, the Brazilian government twice increased the IOF rate levied on exchange transactions related to the inflow of funds for foreign capital investments in the Brazilian market, comprising investments in fixed income instruments, such as debentures and other private debt instruments (tı́tulos de dı́vida privada), and investment funds, including multimarket funds (fundos multimercado), stock funds (fundos de ações), and private equity funds (fundos de investimento em participações-FIPs). Prior to October 5, 2010, the liquidation of such exchange transactions was subject to the IOF at the rate of two percent, in accordance with Decree No. 6.306 of December 14, 2007.45 The first increase was made by means of Decree No. 7.323 of October 4, 2010, which came into force on the following day, when it was published in the Official Gazette of the Union (Diário Oficial da União-DOU).46 As a result, as of October 5, 2010, the transaction rate has been increased from two percent to four percent. Very shortly thereafter, this increase was deemed to be insufficient and, as of October 19, 2010, by means of Decree No. 7.330 of October 18, 2010,47 the applicable rate was increased again from four percent to six percent. At the same time, the IOF rate on exchange transactions for foreign capital investments related to the constitution of margins of guarantee (either initial or additional) required by the stock, commodities and futures exchanges was increased from 0.38% to 6%. The IOF rate on foreign capital investments in the Brazilian capital market, comprising variable income instruments, such as securities traded on the stock exchange or assets traded on the commodities and futures exchange, in the form regulated by the Brazilian Monetary Council (Conselho Monetário Nacional-CMN), remains unchanged and continues to be two percent. Transactions with derivatives which result in predetermined income are considered fixed income and are taxed at the rate of six percent. Currently, there is no IOF on exchange transactions related to the outflow of funds (remittances abroad) related to foreign capital investments in the Brazilian financial and capital markets, because the applicable rate is zero. 45. Decreto No. 6.306, de 14 de Dezembro de 2007, Diário Oficial da União [D.O.U.] de 17.12.2007. (Braz.), available at http://www.planalto.gov.br/ccivil_03/_Ato2007-2010/2007/Decreto/D6306.htm, (article 15 was amended by Derecto No. 7.323 and repealed by Decreto No. 7.330.). 46. Decreto No. 7.323, de 4 de Outubro de 2010, Diário Oficial da União [D.O.U.] de 5.10.2010, (Braz.), available at http://www.planalto.gov.br/ccivil_03/_Ato2007-2010/2010/Decreto/D73.23.htm. 47. Decreto No. 7.330, de 18 de Outubro de 2010, Diário Oficial da União [D.O.U.] de 19.10.2010, (Braz.), available at http://www.planalto.gov.br/ccivil_03/_Ato2007-2010/2010/Decreto/D7330.htm. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW FINANCIAL PRODUCTS & SERVICES 237 To eliminate “creative solutions” aimed to avoid the six percent IOF rate and close loopholes, the CMN Resolution No. 3.914 of October 20, 2010,48 expressly prohibited financial institutions and other entities authorized to operate by the Central Bank of Brazil (Banco Central do Brasil-Bacen) to lease, exchange, or lend instruments, securities, or other financial assets to non-resident investors with the purpose to enable those investors to perform transactions in the derivatives market without paying the IOF. As an exception, transactions contracted before October 21, 2010 (date of publication of CMN Resolution 3,914 in the DOU), may be maintained up to their maturity date. Up to December 31, 2010, undetermined term transactions will not be subject to IOF, but such transactions cannot be postponed nor renewed. Furthermore, for the same reasons, CMN Resolution No. 3,915, also of October 20, 2010,49 established that any domestic migration of funds in Brazilian currency (Real) made by non-resident investors destined to the constitution of margins of guarantee required by the stock, commodities or future exchanges, are subject to simultaneous exchange transactions, pursuant to the provisions of CMN Resolution No. 3.912 of October 7, 2010,50 and consequently, are subject to the six percent IOF rate. On October 6, 2010, in an extraordinary meeting, the Board of Bacen doubled the term of exchange transactions for future liquidation that the Secretariat of the National Treasury has to purchase foreign currency (United States Dollars) in the market in order to pay the External Federal Public Debt, increasing the number of days from 750 days (two years) to 1,500 days (four years). These purchases comprise interbank, arbitrage and financial transactions and the matter is regulated by Bacen Circular No. 3.507 of October 6, 2010.51 This is another measure to control the depreciation of the United States Dollar. The Brazilian government is determined to avoid the overvaluation of the Real and eventually might have some success in achieving this purpose, depending on the effective result of the aggregate measures taken so far. According to the analysts, however, it is very likely that the Brazilian currency, in the same line of the vast majority of currencies of other emerging countries, continues to be affected by the global movement of the weakening of the United States Dollar. The most promising flows for 2011, in the case of Brazil, are those of direct foreign investments and foreign capital investments in securities traded on the stock exchange, which will not be affected by such measures. The attempt to contain the overvaluation of the national currency is not limited to Brazil, and follows several other intervening measures announced by many countries during the last weeks, such as Japan, Korea, and Taiwan, which tried to deal with the constant depreciation of the United States Dollar vis-à-vis their national currencies. 48. Resolução CMN No. 3.914, de 20 de Outubro de 2010, Diário Oficial da União [D.O.U.] de 21.10.10 (Braz.), available at https://www3.bcb.gov.br/normativo/detalharNormativo.do?method=detalharNormativo &N=110089731. 49. Resolução CMN No. 3.915, de 20 de outubro de 2010, art. 1 § 1, D.O.U. de 21.10.10 (Braz.), available at https://www3.bcb.gov.br/normativo/detalharNormativo.do?method=detalharNormativo&N=110089732. 50. Resolução CMN No. 3.912, de 7 de outubro de 2010, art. 1, D.O.U. de 8.10.10 (Braz.), available at https://www3.bcb.gov.br/normativo/detalharNormativo.do?method=detalharNormativo&N=110086413. 51. Circular No. 3.507, de 6 de outubro de 2010, teta 1, capitulo 3, seção 5, 5(a), D.O.U. de 7.10.10 (Braz.), available at https://www3.bcb.gov.br/normativo/detalharNormativo.do?method=detalharNormativo&N=110 086742. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Secured Transactions and Insolvency SUSAN JAFFE ROBERTS, ROBIN PHELAN, AUTUMN HIGHSMITH, MATTIA COLONNELLI DE GASPERIS, MADDALENA SALA, JOHN E. ROGERS, RAMIRO RANGEL, AND FERNANDO BARRITA* This article addresses developments in international secured transactions and insolvency during 2010. Although many developments took place around the world, because of space limitations this article is limited to developments in the United States, Italy, and Mexico. I. Developments in the United States A. CHAPTER 15 AND AVOIDANCE ACTIONS UNDER FOREIGN LAW In a case of first impression, the U.S. Court of Appeals for the Fifth Circuit overruled the decisions of the U.S. Bankruptcy Court and the U.S. District Court for the Southern District of Mississippi and held that a Chapter 15 proceeding may be used to pursue foreign-law avoidance actions against defendants and assets in the United States. * Susan Jaffe Roberts served as Editor of the Committee’s 2010 year-in-review contribution. Ms. Roberts is a partner with the Bankruptcy Section at Whiteford, Taylor & Preston LLP (Baltimore, Maryland). Robin E. Phelan and Autumn Highsmith authored the section on Developments in the United States. Mr. Phelan is a partner with the Bankruptcy and Restructuring Section at Haynes and Boone LLP. Ms. Highsmith is an associate with the Bankruptcy and Restructuring Section at Haynes and Boone LLP. Mattia Colonnelli de Gasperis and Maddalena Sala of Colonnelli de Gasperis Studio Legale (Milan, Italy), authored the section on Developments in Italy. John E. Rogers, Ramiro Rangel, and Fernando Barrita authored the section on Developments in Mexico. Mr. Rogers is Of Counsel at Strasburger & Price LLP (New York, New York). Mr. Rangel is a partner and Mr. Barrita is an associate of Strasburger & Forastieri SC (Mexico City, Mexico). The authors gratefully acknowledge the helpful comments of Steve Roberts and John Dorsey of Strasburger & Price LLP and of Professor Alejandro Garro of Columbia Law School. The authors are, however, solely responsible for the contents of this article. 239 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 240 THE INTERNATIONAL LAWYER 1. Background Condor Insurance Ltd. (“Condor”) formerly operated an insurance and surety bond business in Nevis.1 On November 27, 2006, one of Condor’s creditors requested that the Eastern Caribbean Supreme Court in the High Court of Justice of St. Christopher and Nevis, Nevis Circuit (“Nevis Court”) initiate a winding up proceeding (“Nevis Proceeding”) against Condor.2 On May 18, 2007, the creditor’s winding up petition was granted, and Richard Fogerty and William Tacon were appointed as Joint Official Liquidators (“Liquidators”) by the Nevis Court. On July 26, 2007, the Liquidators, as the foreign representative of Condor, filed a Chapter 15 Petition for Recognition of a Foreign Main Proceeding in the U.S. Bankruptcy Court for the Southern District of Mississippi (“Bankruptcy Court”) seeking recognition of the Nevis Proceeding. On August 21, 2007, the Bankruptcy Court entered its order recognizing the Nevis Proceeding as a foreign main proceeding pursuant to 11 U.S.C. § 1517. After recognition, the Liquidators filed a complaint against Condor Guaranty, Inc. (CGI), Petroquest Resources, Inc., and other defendants (collectively, the “Defendants”) requesting relief for, among other things, the avoidance of fraudulent conveyances under Nevis law. Specifically, the Liquidators contended that over $313 million in Condor’s assets were fraudulently transferred to or by the Defendants and that most of the transferred assets were located in the United States. The Liquidators alleged that the transfers were made to prevent creditors from recovering the value of the assets in the Nevis Proceeding. CGI filed a motion to dismiss the complaint, in part, on the grounds that the Bankruptcy Court lacked subject matter jurisdiction. CGI argued that §§ 1521(a)(7) and 1523(a) of Title 11 of the United States Code (“Bankruptcy Code”) prohibited a foreign representative under Chapter 15 from bringing avoidance actions unless the foreign representative filed a bankruptcy case under either Chapter 7 or Chapter 11 of the Bankruptcy Code.3 2. Applicable Law Bankruptcy Code § 1521(a)(7) provides that a bankruptcy court has the discretion to grant a foreign representative in a Chapter 15 proceeding relief available to a trustee “except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a).”4 Bankruptcy Code § 1523(a) provides that when a foreign proceeding has been recognized, “the foreign representative has standing in a case concerning the debtor pending under another chapter of this title to initiate actions under sections 522, 544, 545, 547, 548, 550, 553, and 724(a).”5 1. Nevis is an island in the Caribbean. Along with Saint Kitts, it forms the Federation of Saint Kitts and Nevis. 2. A “winding up proceeding” is similar to a Chapter 7 bankruptcy under U.S. law. 3. In this case, Condor was not eligible for relief under Chapters 7 or 11 because Condor was a foreign insurance company. Foreign insurance companies are not permitted to file Chapter 7 or Chapter 11 cases. See 11 U.S.C. §§ 109(b), (d) (2011). 4. 11 U.S.C. § 1521(a)(7) (2011). 5. § 1523(a). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURED TRANSACTIONS & INSOLVENCY 241 The specific sections of the Bankruptcy Code referenced in §§ 1521(a)(7) and 1523(a) are those containing a trustee’s “avoidance powers.” These are the trustee’s powers to avoid the transfer of debtor property that would deplete the debtor’s estate at the expense of its creditors. Such powers, generally described, include (i) those addressing exempt property (§ 522); (ii) the “strong arm” power, which permits the trustee to act as a judicial lien creditor (§ 544); (iii) the power to avoid statutory liens (§ 545); (iv) the power to avoid transactions as “preferences” (§ 547); (v) the power to avoid fraudulent transfers (§ 548); and (vi) the power to avoid liens that secure claims for compensatory fine, penalty, forfeiture, or punitive damages (§ 724(a)). Bankruptcy Code § 550 contains the rules that govern the mechanics of avoidance actions. The issue in Condor is whether the exceptions to the relief available to a foreign representative in Chapter 15 ancillary proceedings listed in Bankruptcy Code § 1521(a)(7) prohibit a foreign representative from bringing avoidance actions under applicable foreign law in the Chapter 15 proceeding. The Liquidators argued that the plain language of Chapter 15 only prohibits foreign representatives from utilizing the avoidance provisions of the Bankruptcy Code when seeking avoidance of transfers. The Liquidators contended that Chapter 15 does not prohibit a foreign representative from bringing avoidance actions under foreign law. The Defendants argued that reading Bankruptcy Code §§ 1521(a)(7) and 1523(a) together with the legislative history of both sections prohibit a foreign representative from bringing avoidance actions under either the Bankruptcy Code or foreign law without filing either a Chapter 7 or a Chapter 11 bankruptcy case. 3. The Bankruptcy and District Court Decisions Both the Bankruptcy Court and the U.S. District Court for the Southern District of Mississippi (“District Court”) interpreted Bankruptcy Code §§ 1521(a)(7) and 1523(a) to deny standing to the Liquidators to pursue avoidance actions based on Nevis law. After considering the complimentary relationship between §§ 1521(a)(7) and 1523(a),6 the Bankruptcy Court concluded that “Chapter 15 was not designed to incorporate the law of the home court (here, Nevis) into the United States bankruptcy system” and granted CGI’s motions to dismiss.7 The Bankruptcy Court adopted a portion of CGI’s brief in support of the motion to dismiss that argued: [T]he Liquidators improperly ask this Court to go beyond the parameters of Chapter 15 by using this Court as a de facto Nevis Court, interpreting and applying the substantive law of Nevis against a non-United States entity. The Liquidators cannot use this Court as a hub from which to launch international litigation under foreign avoidance law. If the Liquidators believe they have valid claims, those claims should be asserted elsewhere-not here.8 6. The Bankruptcy Court wrote that Bankruptcy Code § 1521(a)(7) delineates that a bankruptcy court does not have the power to provide relief in the form of avoidance powers to a foreign representative under Chapter 15; instead, Bankruptcy Code § 1523(a) affirmatively states that avoidance powers are available to a foreign representative if (and only if) those powers are exercised in a companion case under Chapters 7 or 11. In re Condor Ins. Ltd., No. 07-51045 ERG, 2008 WL 285843, at *3 (Bankr. S.D. Miss. July 17, 2008). 7. Id. 8. Id. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 242 THE INTERNATIONAL LAWYER The District Court affirmed the Bankruptcy Court’s dismissal, concluding that the Bankruptcy Court had correctly interpreted §§ 1521(a)(7) and 1523(a).9 The District Court concluded that the plain language of Chapter 15 does not specifically address the use of avoidance powers under foreign law but that the legislative history of §§ 1521 and 1523(a) support the Bankruptcy Court’s decision.10 The District Court primarily relied upon a House of Representatives report that provides: The Model Law is not clear about whether it would grant standing in a recognized foreign proceeding if no full case were pending. This limitation [in § 1523] reflects concerns raised by the U.S. delegation during the UNCITRAL debates that a simple grant of standing to bring avoidance actions neglects to address very difficult choice of law and forum issues. This limited grant of standing in [§ 1523] does not create or establish any legal rights of avoidance nor does it create or imply any legal rules with respect to the choice of applicable law as to the avoidance of any transfer or obligation. The courts will determine the nature and extent of any such action and what national law may be applicable to such action.11 The District Court concluded that §§ 1521(a)(7) and 1523(a) are intended to “exclude all of the avoidance powers specified, under either United States or foreign law, unless a Chapter 7 or 11 bankruptcy proceeding is instituted.”12 The District Court went on to explain that the Liquidators’ interpretation of § 1521(a)(7) “would conflict with Congress’ expressed desire that courts make the choice of law determination in a full bankruptcy proceeding.”13 The District Court echoed the Bankruptcy Court suggestion that the Liquidators seek avoidance of the challenged transfers in a Nevis court and then seek recognition of any Nevis judgment in the United States.14 4. The Fifth Circuit Decision The U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”) reversed the decisions of the Bankruptcy and District Courts.15 The Fifth Circuit held that bankruptcy courts have authority to offer avoidance relief under foreign law in Chapter 15 ancillary proceedings.16 The Fifth Circuit explained that “[w]hile it is plain that relief under the listed sections [in § 1521(a)(7)] is excluded, the statute is silent regarding proceedings that apply foreign law, including any rights of avoidance such law may offer.”17 The court referenced the 9. Fogerty v. Condor Guaranty, Inc. (In re Condor Ins. Ltd. (In Official Liquidation)), 411 B.R. 314, 316 (S.D. Miss. 2009). 10. Id. 11. Id. 12. Id. at 319. 13. Id. 14. Id. at 318. 15. Fogerty v. Petroquest Res., Inc. (In re Condor Ins. Ltd. (In Official Liquidation)), 601 F.3d 319, 320 (5th Cir. 2010). 16. Id. 17. Id. at 323. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURED TRANSACTIONS & INSOLVENCY 243 maxim expressio unius est exclusio alterius (the mention of one thing within the statute implies the exclusion of another thing not so mentioned), and concluded that § 1521(a)(7) “provides for ‘any relief’ and excepts only actions under sections 522, 544, 545, 547, 548, and 724(a) of the Code and includes no other language suggesting that other relief might be excepted.”18 The court explained “[i]f Congress wished to bar all avoidance actions whatsoever their source, it could have stated so; it did not.”19 The Fifth Circuit rejected the lower courts’ interpretation of the legislative history of § 1521(a)(7), writing: Congress did not intend to restrict the powers of the U.S. court to apply the law of the country where the main proceeding pends. Refusing to do so would lend a measure of protection to debtors to hide assets in the United States out of the reach of the foreign jurisdiction, forcing foreign representatives to initiate much more expansive proceedings to recover assets fraudulently conveyed, the scenario Chapter 15 was designed to prevent.20 The Court also rejected the Bankruptcy and District Courts’ suggestion that the Liquidators should instead bring their claims in Nevis, explaining that full relief in Nevis might not be available if the Nevis courts cannot exercise jurisdiction over all of the Defendants.21 Additionally, the Fifth Circuit determined that its conclusion was consistent with prior case law under Bankruptcy Code § 304, the predecessor to Chapter 15.22 Indeed, the court reasoned that Chapter 15 might well have been a codification of case law under § 304 that held “avoidance actions under foreign law were permitted when foreign law applied and would provide for such relief.”23 Finally, the court concluded that its holding would create settled expectations of the rules that will govern domestic businesses efforts in foreign territories.24 5. Implications As a result of the Fifth Circuit’s decision in Condor, assets transferred from the situs of a foreign main proceeding to the United States can be collected and distributed to creditors in the same manner as other assets. In the Fifth Circuit, this decision is a powerful tool for foreign representatives attempting to protect a foreign debtor’s assets in the United States. The Bankruptcy Court, the District Court, and the Fifth Circuit did not address Bankruptcy Code § 544, one of the provisions listed in § 1521(a)(7), which provides that a bankruptcy trustee may avoid any transfer “that is voidable under applicable law” by a judgment creditor.25 If “applicable law” under § 544(b) is interpreted by other circuits to 18. 19. 20. 21. 22. 23. 24. 25. Id. Id. Id. Id. Id. Id. Id. 11 at 324. at 327. at 328. at 329. U.S.C. § 544(b) (2011). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 244 THE INTERNATIONAL LAWYER include foreign law, the question of whether § 1521(a)(7) bars foreign avoidance actions could be resolved differently. In short, the Fifth Circuit’s decision in Condor will not be the last word on whether a foreign representative can pursue avoidance actions based on foreign law in a Chapter 15 ancillary proceeding.26 II. Developments in Italy A. ARRANGEMENTS WITH CREDITORS AND DEBT RESTRUCTURING AGREEMENTS On May 31, 2010, the Government of Italy issued Law Decree no. 78 on “Urgent action on financial stabilization and economic competitiveness,”27 converted to Law no. 122 of July 30, 2010.28 Article 48 of the decree amends certain provisions of the Italian Bankruptcy Law29 (IBL) applicable to cross-border and domestic insolvencies. The main goal of such amendments is to support and rescue companies in crisis by, among other things, enhancing the access to banks and shareholders’ credit and liquidity in both the short and long terms, and to facilitate the restructuring and survival of companies in financial distress. Inter alia, foreign and domestic banks and financial institutions are encouraged to grant credit to companies in financial distress because, if such companies go bankrupt, the banks are protected by the fact that their credits are pre-deductible (i.e. they will not be a part of the par condicio creditorum and will be paid with top priority), and as a consequence they will have a very high chance of being paid in full. 1. Possibility of Pre-Deductible Credits Raised in Execution or by Reference to an Arrangement with Creditors or Debt Restructuring Agreement (New Article 82 quater IBL) New Article 182 quarter IBL, “Provisions on pre-deductible credits on debt restructuring agreements,” establishes that the claims arising from loans made in any form by banks 26. The United States Bankruptcy Court for the Southern District of New York has questioned the District Court’s reasoning, which suggests that it might reach the same conclusion as the Fifth Circuit if presented with the issue of whether a foreign representative in a Chapter 15 ancillary proceeding can bring avoidance actions under foreign law. See In re Atlas Shipping A/S, 404 B.R. 726, 743, 744 n.15 (Bankr. S.D.N.Y. 2009) (“While the parties relied extensively on Condor in briefing, the Court concludes that its reasoning is open to question . . . The Condor [district] court’s conclusion that Congress intended to prevent a foreign representative from bringing avoidance actions based on foreign law is not supported by anything specifically in the legislative history. The [district] court also ignores cases decided under § 304.”). In Atlas, the bankruptcy court also noted that no other court has addressed whether “applicable law” under § 544(b) includes foreign law. Id. at 744, n.16 (suggesting that a preference action under foreign law could still be brought even if § 544(b) is interpreted to include foreign law because preference actions under foreign law most likely do not depend on status as a judgment lien creditor). 27. Decreto Legge 31 maggio 2010, n. 78, in G.U. 30 luglio 2010, n. 176 (It.), available at http://www.alta lex.com/index.php?idnot=11219. 28. Legge 30 luglio 2010, n. 122, in G.U. 30 luglio 2010, n. 176 (It.), available at http://www.urp.it/allegati/ Legge_2010_122.pdf. 29. Regio Decreto 16 marzo 1942, n. 267, in G.U. 6 aprile 1942, n. 81 (It.), available at http://www.altalex. com/index.php?idnot=2888. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURED TRANSACTIONS & INSOLVENCY 245 and financial institutions registered in the lists referred to in Article 106 and 107 of Legislative Decree of 1 September 1993 no. 38530 under the execution of: • an arrangement with creditors referred to in Article 16031 IBL and following, or • a debt restructuring agreement approved pursuant to Article 182 bis,32 are pre-deductible under and for the purpose of Article 111 IBL.33 Also included in this category are: claims arising from loans finalized in the arrangement with creditors or for funding under the plan of restructuring developed in the proceeding; funding from the company’s shareholders (in derogation of Articles 2467 and 2497 quinquies of the Italian Civil Code), up to eighty percent of the amount; and the amounts owed to professionals for their work on these procedures, referred to in the third paragraph of Article 16134 IBL and in the first paragraph of Article 182 bis IBL. The above-mentioned creditors are excluded from voting and from the counting toward a majority for approval of the agreement pursuant to Article 177 IBL35 and for calculation of the percentage of claims referred to in Article 182 bis, first and sixth paragraphs.36 2. Suspension Of Enforcement Measures And Protective Measures During The Negotiations To Conclude Debt Restructuring Agreements (New Article 182 bis IBL) New paragraph 6 of Article 182 bis IBL prohibits the commencement or continuance of precautionary measures or enforcement actions during the negotiations for an arrangement with creditors or for debt restructuring agreements, if: • the entrepreneur has submitted a declaration confirming the presence of negotiations with creditors representing at least sixty percent of the overall claims; and • the declaration is accompanied by a statement of an advisor, who meets the requirements of Article 67, ¶ 3(d) IBL37 ensuring regular payment of creditors with whom negotiations are not in progress or who are unwilling to negotiate. According to this new provision, companies in financial distress have an additional tool to overcome financial crisis and to reorganize their businesses. III. Developments in Mexico A. MEXICO’S NEW SECURED TRANSACTIONS REGISTRY OFFERS NEW OPPORTUNITIES FOR SECURED LENDING Mexican companies have historically encountered difficulties in attracting secured lending from U.S. and other foreign banks, mainly because of concerns as to the reliability of Mexican laws governing secured transactions and of its systems for filing and perfecting security interests (garantı́as reales) in personal (movable) property or goods (bienes muebles). 30. Decreto Legislativo 1 Settembre 1993, n. 385, in G.U. 30 Settembre 1993, n. 230 (It.), available at http://www.isaonline.it/s/gestione/show-main-frame.inc.php?url=/mag/DLgs385-1993.html. 31. R.D. n. 267/1942 (It.). 32. Id. 33. Id. 34. Id. 35. Id. 36. Id. 37. Id. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 246 THE INTERNATIONAL LAWYER Mexican banks have shared these concerns and have tended to rely on real property collateral in most of their secured lending. As a result, many Mexican companies whose primary assets are inventory, receivables, and equipment have lacked access to adequate financing on competitive terms. In order to encourage lenders to finance the operations of Mexican borrowers, Mexico has enacted significant reforms of its secured transactions laws. Most recently, dramatic steps have been taken to improve its public registry system to make it easier to search for existing liens on a debtor’s property and to perfect new security interests. 1. Mexican Bankruptcy Considerations The importance to creditors of taking collateral security from Mexican debtors has arguably been increased by the Mexican Bankruptcy Law (“Ley de Concursos Mercantiles” or “LCM”) enacted in 2000 and subsequently amended.38 The LCM does not permit the “cram down” of secured creditors to the extent permitted under the U.S. Bankruptcy Code, which allows a debtor, under a reorganization plan, to pay a secured creditor less than its full claim if it is under-collateralized. The secured claim can be “crammed down” to the value of the collateral by paying under the plan, over time, the value of the collateral, with the remainder of the claim being treated as unsecured.39 Under the LCM, on the other hand, a secured creditor may proceed with the enforcement of its collateral security if the reorganization plan does not provide for full payment of the secured debt.40 This gives the secured creditor significant negotiating leverage in a restructuring under the LCM, and has implications not only for secured bank lending but also for Mexican corporate bond financings, as to which bond investors may have a strong argument based on the LCM to insist on collateral security. If an issuer must provide such collateral, for example to support a high-yield bond offering, it may be less costly for the issuer to provide collateral consisting of personal property than to mortgage its real property, partly because of high mortgage recording costs and the related notarial fees. In order to obtain the advantages of treatment as a secured creditor under the LCM, having personal property collateral is as effective as having real property collateral of comparable value. 2. Like the United States Before the UCC Mexico has a bewildering variety of personal property security interests, including among others, the pledge (prenda), the industrial mortgage (hipoteca industrial), the specialized security interests tied to the crédito refaccionario, and the crédito de habilitación y avı́o, which brings to mind the personal property collateral devices (such as chattel mortgages and trust receipts) that were commonly used in the United States prior to the adoption of the Uniform Commercial Code. Although Mexico has had the advantage of a single commercial code (and other federal secured transactions laws) that apply to the entire country, rather than a system of separate state laws as in the United States, each of the thirty-two 38. Ley de Concursos Mercantiles [LCM] [Mexican Bankruptcy Law], as amended Diario Oficial de la Federación [DO], 12 de Mayo de 2000 (Mex.). 39. 11 U.S.C. § 1129(b)(2)(A) (2011). 40. See Ley de Concursos Mercantiles [LCM] [Mexican Bankruptcy Law], as amended, arts. 158, 160, Diario Oficial de la Federación [DO], 12 de Mayo de 2000 (Mex.). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURED TRANSACTIONS & INSOLVENCY 247 states and the Federal District has its own civil code establishing a Public Registry system for real property deeds and mortgages (each such registry is a Registro Público de la Propiedad). Although personal property security filings are governed by the federal Commercial Code, they must be made in the commercial registry (“Registro Público de Comercio” or “RPC”), which is normally managed by a unit of the related State or municipal government, in the place of the debtor’s domicile. Some of these locally managed commercial registries are less reliable than others, and significant delays are common in searching for existing liens and filing new security interests on collateral of companies domiciled in remote locations. 3. The Non-possessory Pledge and the Guaranty Trust On the substantive side, Mexico has made significant progress since 2000 by amending the Mexican Commercial Code and the General Law of Credit Instruments and Transactions (“Ley General de Tı́tulos y Operaciones de Crédito” or “LGTOC”) to permit personal property security interests to be created more easily on a “floating lien” basis. A new type of non-possessory pledge called the prenda sin transmisión de posesión allows a debtor to pledge all of its inventory and receivables, for example, generically described (rather than described by reference to specific items), to a secured party without requiring that possession of the collateral be transferred to the secured party. This pledge can permit the debtor to sell the pledged collateral in the ordinary course of business without obtaining a case-by-case release from the secured party. And, it can automatically subject newly acquired property to the pledge without any further filing, which effectively results in a floating lien. A similar effect can be achieved through a guaranty trust (fideicomiso de garantı́a) with respect to the same or similar types of property, whereby title to the collateral is transferred to a Mexican trustee (typically a Mexican bank).41 Although these new devices resemble a security interest created in the United States under Article 9 of the UCC, lenders have remained reluctant to significantly expand their secured lending activities in Mexico because of ongoing concerns about their ability to perfect these security interests against third parties through the public registry system. 4. UNCITRAL and the OAS Encourage Registry Reforms Recently, in an attempt to provide guidance for emerging market countries like Mexico that wish to improve access by borrowers to secured lending, the United Nations Commission on International Trade Law (UNCITRAL) has promoted reforms of the bankruptcy laws and secured transactions laws in such countries. Its 2008 Legislative Guide on Secured Transactions indicated the importance of a country having a “registry in which information about the potential existence of security rights in movable assets may be made public.”42 In 2010, UNCITRAL decided to expand its work in this field by preparing a “model registry regulation,” which is still in the process of preparation. 41. Published in the DO on May 23, 2000, with amendments published in the DO on June 13, 2003. 42. Legislative Guide on Secured Transactions of the UNCITRAL, GA Res. 63/121, U.N. GAOR, 63rd Sess., U.N. Doc. V.10-57126 (E) (Dec. 17, 2008). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 248 THE INTERNATIONAL LAWYER The previous efforts of the Organization of American States (OAS) to adopt a Model Inter-American Law on Secured Transactions (“Model Law”)43 appear to have influenced Mexico in its adoption of the non-possessory pledge concept. The OAS has also been tackling the registry issue. In October 2009, it held its Seventh Inter-American Conference on Private International Law, which approved Model Registry Regulations to “provide the legal foundation for implementing and operating the registry regime contemplated by the Model Law.”44 Among other things, the Model Registry Regulations contemplate the adoption of electronic filing systems and acknowledge that most of their features were recommended in UNCITRAL’s 2008 Guide and included in the registry systems recently developed in some Latin American countries, including Mexico, as well as in the United States (the UCC), Canada (the Personal Property Security Act), and some European countries. 5. Mexico’s 2009 Commercial Code Amendments and Creation of the RUG Mexico has been receptive to the objectives reflected by the UNCITRAL and OAS efforts. Not only did Mexico enact secured transactions law reforms in 2000 and in subsequent years to reflect many of the changes contemplated by the OAS’ Model Law, but Mexico’s initiatives with respect to public registry reforms have actually preceded the formal adoption of model rules by UNCITRAL and the OAS. In August 2009, a few months prior to the adoption of the OAS Model Registry Regulations, the Mexican Congress approved amendments to the federal Commercial Code that provide for the establishment of a Unified (or Sole) Registry of Movable Property Collateral (“Registro Único de Garantı́as Mobiliarias” or “RUG”).45 The new Article 32 bis of the Code provides for the RUG (pronounced “roog”) to be a centralized registry for all types of security interests granted in favor of any creditor that carries out commercial activities (a comerciante) in personal property. The RUG will be a section of the PRC under the supervision of the Ministry of Economy (Secretarı́a de Economı́a), in which all filings are to be carried out electronically, through the RUG website, http://www.rug.gob.mx. The stated congressional purpose of the RUG is to strengthen the system for personal property secured transactions “as an effective tool for access to credit.” Its main functions are to create a mechanism that allows public disclosure of security interests created on personal property and to establish priority rules for secured creditors. Filings through the RUG have immediate effect, without requiring any approval by any authority. Such filings can be made by financial institutions, public officials, public notaries (notarios públicos), or brokers (corredores públicos), and others authorized by the Ministry of Economy. Under Article 32 bis (4) of the amended Commercial Code, a debtor is generally deemed to have authorized any secured party creditor that is a comerciante to file evidence of the applicable security interest in the RUG. Article 32 bis (7) allows “any interested party” to request the 43. The Model Law was adopted on February 8, 2002, by the Sixth Inter-American Specialized Conference on Private International Law (known as “CIDIP-VI”, for its Spanish acronym). Organization of American States, CIDIP-VI, Final Act 3(f), OEA/Ser.K/XXI.6/ CIDIP-VI/doc.24/02 rev.3 (Mar. 5, 2002), available at http://www.oas.org/dil/CIDIP-VI-finalact-Eng.htm. 44. Approved by the Seventh Inter-American Specialized Conference on Private International Law (CIDIP-VII) at its second plenary session of October 9, 2009); quoted language appears in the Introduction. 45. Código de Comercio [CCo.] [Commercial Code], as amended Diario Oficial de la Federación [DO], 27 de Agosto de 2009 (Mex.). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURED TRANSACTIONS & INSOLVENCY 249 issuance of a certification as to the filings that have been made in the RUG with respect to any debtor. 6. New Registry Regulations On September 23, 2010, an executive decree was issued by Mexican President Felipe Calderón implementing the 2009 Commercial Code amendments by amending the Regulations governing the PRC to provide specifically for the inclusion of the RUG as a section of the overall PRC.46 The amendments clarify how the RUG will operate through the electronic system called the Integrated System of Registry Procedures (“Sistema Integral de Gestión Registral” or “SIGER”) and the procedures to be followed for the use of the RUG by those who wish to (i) search it for the existence of existing security interests and (ii) perfect their own security interests as against third parties by filing notices. Anyone who registers with the RUG can initiate a search, but filings of security interests directly by an institutional creditor can only be done if the creditor entity has arranged to utilize an electronic signature for this purpose which satisfies the technical requirements contemplated by the Commercial Code.47 Otherwise, the security interest must be filed on the creditor’s behalf by someone else authorized under the RUG to do so. The provisions of the amended Regulations (“Amended Registry Regulations”) impose certain formalities which do not seem to be contemplated by the new Article 32 bis of the Commercial Code and may contravene the policy guidelines recommended by the OAS and UNCITRAL. For example, Article 10 of the Amended Registry Regulations provides for the RUG registrar or officer to verify that a filing has been properly made “in accordance with applicable legal and regulatory provisions,” which would seem to prevent the filing from becoming immediate and automatic, as provided in Article 32 bis (4) of the amended Commercial Code. Also, Article 10 bis of the Amended Registry Regulations specify that filings can only occur through a public authenticating officer (fedatario), i.e., a public notary (notario público) or broker (corredor público), although Article 30 bis seems to permit others, including financial entities, to make filings without using a fedatario. As a practical matter, until changes are made in Article 10 bis to allow filings to be made otherwise, it seems advisable to use a fedatario to carry out the filing. A number of law firms in Mexico employ fedatarios, so this should not be a significant impediment to the filing process or impose a significant additional cost. The use of a fedatario has the advantage of avoiding the requirement under Article 10 that the RUG registrar or officer verify the propriety of the filing; under Article 10 bis a filing by a fedatario has immediate effect. 7. Preventive Filings Prior to the closing of a secured lending transaction, the proposed lender may wish to have the comfort that there will be no last-minute filings by other lenders of security interests that would have priority (based on time of filing) over any security interest to be filed to secure the transaction in favor of the proposed lender. To obtain such comfort, Articles 32 bis (5) of the Commercial Code amendments and 33 bis of the Amended Regis46. Código de Comercio [CCo.] [Commercial Code], as amended Diario Oficial de la Federación [DO], 23 de Septiembre de 2010 (Mex.). 47. Id. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 250 THE INTERNATIONAL LAWYER try Regulations permit the proposed lender to make a filing prior to the scheduled closing, which will have the effect of preventing any other lender from making a filing that would have priority over the later definitive filing by the proposed lender of its own security interest. If the closing does not take place, the debtor need not seek removal of the preventive filing from the records of the RUG, because such filing would automatically cease to be effective after the passage of a specified period, normally two weeks. 8. Information to be Provided in Filings through the RUG Article 33 bis (2) of the Amended Registry Regulations provides that the information that must be provided in the filing of the security interest will be (i) the name of the debtor or debtors granting the security interest, (ii) the name of the creditor or secured party, (iii) the type of security device utilized to create the security interest, (iv) the personal property securing the relevant obligations, (v) the secured obligations, (vi) the term or time frame during which the filing will be effective, and (vii) anything else contemplated by Article 33 of such regulations (i.e., anything else that may be required by the forms to be used in order to effect such filings, which are to be specified in a publication in the official Gazette (“Diario Oficial”) of the Republic). 9. Using the RUG As contemplated by the Amended Registry Regulations, to provide further guidance on using the RUG, the Ministry of Economy published a User’s Guide (“Guı́a de Usuario”) in Spanish providing additional guidance as to how the search and filing processes will operate.48 The User’s Guide shows how (i) a user can become registered with the RUG, (ii) searches can be performed, (iii) search certificates can be obtained, (iv) secured party creditors (whether organized or resident within or outside of Mexico) can be registered, and (v) the creditor’s representatives can be registered in order to be entitled to submit filings on behalf of the creditor. Mexican creditors can be registered online by including their Mexican tax ID numbers in the creditor information they provide. In the case of foreign creditors not having such numbers, the registration may be carried out at one of the designated offices of the Ministry or through a fedatario. Foreign creditors that wish to avoid delays at the closing of a secured loan may wish to become pre-registered before the closing. For cases involving multiple creditors, such as a syndicated loan, there is a separate procedure for entering the names of the additional creditors. As for the debtor, the filing form contemplated by the User’s Guide mandates that it be filed electronically in such a way that the debtor’s name is accompanied by an indication of whether the debtor is an individual or an entity and his or its nationality, registration file (folio) number and taxpayer ID or CURP number. A debtor that is an individual may be registered by a fedatario at the time of the filing of the security interest, but a debtor that is a company or other entity will have to have been registered in the PRC prior to the time of filing. 48. See Guı́a del Usuario para el uso del sitio rug.gob.mx [User Guide for Use of the rug.gob.mx Website], El Registro Único de Garantı́as Mobiliarias [Registry for Secured Transactions] (Mex.), http://www.rug.gob.mx/ Rug/resources/pdf/guia%20de%20usuario/Manual%20de%20Usuario%20RUG.pdf (last visited Feb. 12, 2011). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURED TRANSACTIONS & INSOLVENCY 251 According to the User’s Guide, the filing of a security interest is to be effected by making entries in the electronic equivalent of a document akin to a UCC financing statement, which should specify: (i) the name and address of the person requesting the registration of the security interest; (ii) a description of the type of property subject to the security interest, such as “machinery and equipment” (the applicable type is to be selected from alternatives that appear on the screen); (iii) the type of security document under which the security interest was created, i.e. whether it was a non-possessory pledge, guaranty trust etc. (again, the selection is from the types indicated on the screen); (iv) the date of the relevant security agreement; (v) the maximum amount secured, specifying the applicable currency; (vi) a more detailed description of the property subject to the security interest; (vii) a description of the public deed issued before the fedatario which formalized the security agreement; (viii) a description of the agreement under which the secured obligation arose; (ix) optionally, any terms and conditions established by the documents; and (x) the period of time for which the filing is to remain effective. The User’s Guide provides examples of entries that are to be made in the online “financing statement,” and indicates how the electronic signature is to be applied to the document in order to effect its filing. The User’s Guide includes similar instructions for related procedures, such as amendments, assignments, renewals, or reductions of the effective term of the filing; corrections of errors; cancellations; and “annotations” (anotaciones). The annotations might include information on any enforcement action with respect to the security interest, and would be made pursuant to instructions from a court or other authority. An annotation might result from a debtor challenging the propriety of the filing. 10. Effect of the Reforms: Better than the UCC? The RUG is now the exclusive method in Mexico for perfecting security interests in inventory, receivables, equipment, and many other types of personal property; whether created through a possessory or non-possessory pledge, guaranty trust, or other device, the RUG supersedes all of the local public registries. However, security interests previously filed in the local registries will continue to be effective, so lenders must undertake searches as to any debtor in the locally-managed public registry responsible for such debtor’s domicile until such time as the previously filed security interests are no longer effective (i.e., because they have been released or the related debt has been repaid) or otherwise satisfy themselves that no such filings have occurred (i.e., by obtaining representations and warranties from the debtor to this effect). Similar transition issues were encountered in the United States during the implementation of the UCC and its associated filing systems. Two features are present in the Mexican situation that did not exist in the case of the adoption of the UCC. First, the RUG will be the sole registry in Mexico for filing security interests in personal property, unlike the separate filing systems in the fifty states of the SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 252 THE INTERNATIONAL LAWYER United States and in the District of Columbia and many local filing places such as the offices of County Clerks. Thus, the sometimes thorny question in the United States of where to file will not apply in Mexico. Secondly, the RUG is exclusively electronic, as opposed to the recordation systems in the United States, which initially relied entirely on paper filings and have only recently began to transition to electronic systems, gradually, on a state-by-state basis. It will still be necessary to comply with the relevant requirements for creating security interests, which in Mexico often requires that the security agreement or pledge agreement be formalized by the preparation by a fedatario of a formal deed (escritura). Instead of being recorded in the locally managed public registry, such deed should now be recorded in the RUG. Filings as to some types of collateral, such as vessels and aircraft, will continue to be made in specialized registries. But with those exceptions, and despite some uncertainty created by the amended Regulations, the establishment of the RUG represents a huge step forward by Mexico in making secured lending an attractive option for borrowers and lenders alike. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Securities and Capital Markets* EDITED BY: AUTHORED ROBERT SAMIR KUSTER BY: JOÃO OTÁVIO PINHEIRO OLIVÉRIO, PAULO SATOSHI NAKAMURA, WALTER DOUGLAS STUBER, ADRIANA MARIA GÖDEL STUBER, CARLOS FRADIQUEMENDEZ, ADRIANA CAROLINA OSPINA JIMÉNEZ, DR. MANFRED KETZER, DR. HARTMUT KRAUSE, AJIT SHARMA, DR. MD ANOWAR ZAHID, DAVID QUIGG, JOHN HORNER, ASHA STEWART, JUSTIN SCHLUTH, WALTER G. VAN DORN, JR., AND JEFFREY KRILLA The following article summarizes selected changes announced or implemented this year in the regulation of international securities and capital markets in Brazil, Colombia, EU, Germany, India, Malaysia, New Zealand, and the United States. I. Developments in Brazil A. BRAZILIAN CAPITAL MARKETS* Activity in the Brazilian capital markets in 2010 was characterized by a recommencement, after the subprime and subsequent crisis post-2008, of follow-on offerings by some real estate companies in the first semester, a retake of new equity offerings, mainly in the oil & gas and infrastructure industries, and the beginning of a potential new trend, viz. * João Otávio Pinheiro Olivério, Campos Mello Advogados, in cooperation with DLA Piper and Paulo Satoshi Nakamura (São Paulo, Brazil), contributed Part A of Brazil’s developments, and Walter Douglas Stuber and Adriana Maria Gödel Stuber, Walter Stuber Consultoria Jurı́dica (São Paulo), contributed Part B. Carlos Fradique-Mendez and Adriana Carolina Ospina Jiménez, Brigard & Urrutia (Bogotá, Colombia), contributed Colombia’s developments. Dr. Manfred Ketzer, Hausmaninger Kletter Rechtsanwälte GmbH, (Vienna, Austria), contributed EU’s developments. Dr. Hartmut Krause, Allen & Overy LLP (Frankfurt, Germany), contributed Germany’s developments. Ajit Sharma, Trilegal (Mumbai, India), contributed India’s developments. Dr. Md Anowar Zahid, Universiti Kebangsaan Malaysia (National University of Malaysia), (Bangi Selangor, Malaysia), contributed Malaysia’s developments. David Quigg, John Horner, and Asha Stewart, Quigg Partners (Wellington, New Zealand), contributed New Zealand’s developments. Justin Schluth, Widener University School of Law, (Glassboro, New Jersey), contributed Part A of United States’ developments, and Walter G. Van Dorn, Jr., and Jeffrey Krilla, SNR Denton US LLP (New York and Washington D.C., respectively, United States), contributed Part B. Edited by Thomas M. Britt III, Debevoise & Plimpton LLP (Hong Kong SAR, China). * By João Otávio Pinheiro Olivério and Paulo Satoshi Nakamura. 253 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 254 THE INTERNATIONAL LAWYER foreign companies raising funds in the local market. As milestones, the volume of securities instruments related to the real estate industry, such as public offerings issued by the Real Estate Investment Funds and the Funds for Securitized Receivables (so-called CRI) reached its historical peak in 2010, and the influence of Petrobras’ significant stock market offering somehow halted other offerings that were in the pipeline. Compared to other years, in which the Brazilian Securities and Exchange Commission (CVM) sponsored many discussions about and amendments to capital markets regulation, the Commission in 2010 focused on making its supervision more effective, in particular by punishing infringements of law with hard penalties. Important transactions were scrutinized by CVM, and administrative proceedings regarding these transactions were concluded with violators entering into settlements to dismiss the respective cases. Examples include: (i) insider trading operations (Suzano acquisition of Ripasa, joint acquisition by Petrobras, Braskem and Ultrapar of Ipiranga and Perdigão acquisition of Sadia), (ii) failure to disclose material information (LAEP and Petrobras), and (iii) concerns about manager due diligence over the derivative-currency losses that occurred in some companies during the 2008 turmoil (Aracruz and Sadia). Against this backdrop, the major developments and events in the Brazilian capital markets in 2010 (exclusive of the rule changes applicable to securities analysts, discussed in Part I(B) below) are as follows: 1. Petrobras Follow-on Offering In September 2010, the Brazilian stock market witnessed the biggest equity offering in the world’s history: a R$120 billion transaction by Petrobras. The oil company undertook this offering in order to fund its expansion plans. This large offering may have contributed to keeping the number of other equity offerings relatively low during the year, but, now that this deal is concluded, it points to an increase in 2011. Some questions regarding conflict of interests and the offering’s quiet period arose. A few days after the offering was completed, the equity research departments of some bookrunners distributed a report criticizing the transaction economics, but because they had to comply with the quiet period rules, such report was not released during the book-building process. This troublesome situation negatively affected Petrobras’ stock price. 2. Amendments to Corporate Governance Self-regulatory Rules Issued by Bovespa Considering the new concerns raised by the São Paulo-based securities exchange BM&F Bovespa to improve the rules for “Novo Mercado,” “Nı́vel 1,” and “Nı́vel 2” listing segments that comprise self-regulatory best practices of corporate governance that has been carried out by 160 companies so far,1 additional concepts were discussed by all the participants, with final changes agreed in September. The most important resolution determined that the roles of Chairman of the Board of Directors and Chief Executive Officer cannot be performed by the same person. However, some controversial subjects were not approved, such as: (i) increasing the percentage of Independent Directors participating in the Board from twenty percent to thirty percent (Novo Mercado and Nı́vel 2), 1. Confira o resultado da proposta de alteração dos regulamentos do Novo Mercado [Proposed amendment to new market regulations], Nı́veis 1 e 2, BM&F BOVESPA, http://www.bmfbovespa.com.br/empresas/pages/100909 NotA.asp?WT.ac=PT_FullBanner-Audiencia_Restrita-2 (last visited Jan. 9, 2011). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURITIES & CAPITAL MARKETS 255 (ii) establishing a permanent Audit Committee with one Independent Director (all three segments), and (iii) a mandatory takeover with a threshold of thirty percent in total equity capital, similar to the EU Takeover Directive disposition (Novo Mercado). 3. BDR Improvements After October, certificates backed by shares of blue chip foreign companies are eligible to be traded on BM&F Bovespa, using the non-sponsored Brazilian Depositary Receipt (BDR) program, a specific segment that does not require any direct participation by the relevant foreign company to have its shares traded in Brazil. Some companies included are Apple, Google, Goldman Sachs, Walmart, and Exxon Mobil. Moreover, it is important to stress that, after January 2010, amendments to the rules of the BDR program, introduced by CVM through Normative Ruling 480, are in full effect. Because BDRs may be backed only by shares issued by foreign companies, and in order to prevent their use by corporations with their main operations in Brazil (which, depending on the corporate structure defined by their shareholders, may not comply with all of the corporate governance rules provided for in Brazilian law), new candidates wishing to participate in this program have to face additional criteria to be registered, viz. maintaining a head office outside Brazil and having less than fifty percent of their assets located in Brazil. 4. Currency control and Tax on Financial Operations (IOF) In an attempt by the government to prevent the Brazilian currency from being overvalued relative to the U.S. Dollar, IOF rates were increased from two percent to six percent in respect of transactions by foreign investors in the Brazilian fixed-income market. These changes were effective in October. B. SECURITIES ANALYSTS IN BRAZIL MUST OBEY NEW RULES* By means of CVM Instruction No. 483 of July 6, 2010, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários–CVM) issued new rules applied to the securities analysts,2 which are valid as of October 1, 2010. The main objectives of these rules are: (a) to modernize and improve the rules of conduct to which analysts are subject, (b) to recognize the responsibilities of the institutions that employ securities analysts, and (c) to strengthen the structure of self-regulation applicable to them. Individuals or legal entities that carry out risk classification activities are not subject to these rules. A securities analyst is the individual who professionally prepares analysis reports for publication, disclosure or distribution to others, even though restricted to clients. The term “analysis report” means any text, monitoring reports, studies or analyses on specific securities or issuers of certain securities or influence that might assist investors in making investment decisions. Public exhibitions, presentations, meetings, conference calls, and other non-written events, whose content is typical of the analysis report, are also included in the same definition. * By Walter Douglas Stuber and Adriana Maria Gödel Stuber. 2. See Brazilian Official Gazette of the Union (Diário Oficial da União - DOU), July 12, 2010, available at http://www.cvm.gov.br/asp/cvmwww/atos/Atos/inst/inst483.doc. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 256 THE INTERNATIONAL LAWYER It is forbidden for a securities analyst: (i) to issue analysis reports in order to obtain improper advantage for himself/herself or for others, (ii) to omit information on conflict of interest, (iii) to negotiate directly or indirectly, in his/her own name or in the name of others, securities that are the object of analysis reports or derivatives backed by such securities for a period thirty days before and five days after the disclosure of the analysis report on such security or its issuer, and (iv) to deal directly or indirectly, on behalf of himself/herself or others, securities that are the object of analysis reports or derivatives backed by these securities that conflict with the recommendations or conclusions expressed in the reports for up to six months from the disclosure of such report, or until the release of a new report on the same issuer or security. The restrictions mentioned in items (iii) and (iv) herein do not apply to trading with shares of investment funds, unless the analyst can influence directly or indirectly the administration or management of the fund, or the investment fund concentrates its investments in industries or businesses covered by the reports produced by the analyst. The distribution system institutions and securities analyst companies that hire securities analysts must: (i) supervise the financial activities of the professional analysts related to them to ensure compliance with these regulations; (ii) develop and implement rules, procedures and adequate internal controls to (a) ensure that the analysts will perform their functions independently, (b) prevent their commercial interests or those of their clients from influencing the analysts’ work related to them, (c) identify, manage and eliminate conflicts of interest that may affect the impartiality of the analysts, and (d) ensure that the requirements for the analysis reports are met in all the reports published, disseminated, or distributed; (iii) ensure that the professionals they bound comply with the set of rules provided for in item (ii) herein; (iv) disclose such set of rules and any updates thereto in their webpage; (v) immediately inform CVM and/or the accrediting entity about any acts committed by the analysts that may be deemed to be an evidence of violation of the CVM rules or non-compliance of the norms of the code of professional conduct; and (vi) physically segregate the location where the team of analysts carries out its activities from the location of the other activities performed by the company. The organizational structure of these companies should not allow an individual whose duties are potentially incompatible with the fairness opinion issued by the analyst to supervise him/her or otherwise have interference on the content of the analysis reports or on the remuneration of the analyst. The compensation of analysts should be structured so as to preserve their impartiality. The analysis team should be formed by at least thirty percent of accredited analysts until December 31, 2010, fifty percent of accredited analysts until December 31, 2011, and seventy percent of accredited analysts until December 31, 2012. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURITIES & CAPITAL MARKETS 257 II. Developments in Colombia* Recent regulatory changes in the Colombian capital markets reflect Colombia’s newfound economic prominence and increased level of financial sophistication. Two important regulatory changes were introduced in 2010: (i) Decree 2555 of 20103 that unified certain decrees and regulations in the area of finance, securities, and reinsurance, and that now includes regulations on the offering of cross-border financial and securities services in Colombia (formerly embodied in the Decree 2558 of 2007),4 and (ii) the “Multifund Scheme” Decree 2955 of 20105 that changed certain regulatory requirements (including investment limits) for Colombian pension funds for purposes of alternative investments in private equity funds and certain entities incorporated abroad. The Colombian Government issued regulations authorizing the creation of the Securities Trading System for Foreign Securities, which allows foreign issuers’ securities to be listed and traded on qualifying Colombian systems without prior registration with the National Registry of Securities and Issuers and without approval of the Superintendence of Finance (the “Superintendence”).6 In addition, following the successful registration of Pacific Rubiales on the Colombian Stock Exchange, the government has issued regulations to facilitate the dual listing process for foreign issuers in Columbia.7 Given the significant increase in the number of the foreign financial institutions looking to render cross-border financial and securities-related services to Colombian investors, the marketing rules with respect to the offering of such services are of great interest to the international financial community. Pursuant to Decree 2555 of 2010, any foreign financial institution providing financial, reinsurance, or securities-related services, and seeking to market its products or services in Colombia is required either to establish a representative office in Colombia or to enter into a referral agreement with a Colombian brokerdealer or a financial corporation. Representative offices act as a liaison between the home offices of foreign financial institutions and their clients in Colombia and are permitted to (i) deliver and receive client * By Carlos Fradique-Mendez and Adriana Carolina Ospina Jiménez; edited by Robert Samir Kuster. 3. “Decreto por el cual se recogen y reexpiden las normas en materia del sector financiero, asegurador y del mercado de valores y se dictan otras disposiciones,” Decreto No. 2555, de 15 de julio de 2010, Diário Oficial da União [D.O.U.] de 47.771.2010. (Braz.), available at http://www.avancejuridico.com/actualidad/ documentosoficiales/47771.html. 4. “Por el cual se expide el régimen de las oficinas de representación de instituciones financieras, reaseguradoras y del mercado de valores del exterior y se dictan otras disposiciones,” Decreto No. 2558, de 6 de julio de 2007, Diário Oficial da União [D.O.U.] de 46.681.2007. (Braz.), available at http://www.avance juridico.com/actualidad/documentosoficiales/46681.html. 5. “Por el cual se modifica el Decreto 2555 de 2010, se establece el régimen de inversión de los recursos de los Fondos de Pensiones Obligatorias y se reglamentan parcialmente la Ley 100 de 1993, modificada por la ley 1328 de 2009, la ley 549 de 1999, la ley 550 de 1999 y el decreto ley 1283 de 1994,” Decreto No. 2555, de 6 de agosto de 2010, Diário Oficial da União [D.O.U.] de 47.793.2010. (Braz.), available at http://www.avance juridico.com/actualidad/documentosoficiales/47793.html. 6. “Por el cual se reglamenta el listado de valores extranjeros en los Sistemas de Cotiza-ción de Valores Extranjeros y se dictan otras disposiciones,” Decreto No. 3886, de 8 de octubre de 2009, Diário Oficial da União [D.O.U.] de 47.496.2009. (Braz.), available at http://www.avancejuridico.com/actualidad/documentosoficiales/47496.html. 7. “Por el cual se modifican los artı́culos 5.2.6.1.2 y 6.11.1.1.2 del Decreto 2555 de 2010,” Decreto No. 2826, de 5 de agosto de 2010, Diário Oficial da União [D.O.U.] de 47.792.2010. (Braz.), available at http:// www.avancejuridico.com/actualidad/documentosoficiales/47792.html. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 258 THE INTERNATIONAL LAWYER documents required in connection with the provision of services, (ii) advise clients on the risk characteristics of certain types of transactions, and (iii) provide information on fees, expenses, and tax implications regarding the provision of services. Representative offices are barred from carrying out, directly or indirectly, any on-shore financial or securitiesrelated activity that requires the authorization of the Superintendence, and are barred from raising funds (either in Colombian Pesos or in any foreign currency), regardless of whether such funds are raised through acceptance of deposits, issuance of securities, or in any other manner. The Superintendence must authorize the establishment of a representative office, and its operations are subject to the Superintendence’s supervision. Another method to establish a presence in the Colombian market is through execution of a referral agreement between the foreign entity and a local broker-dealer or financial corporation. In general, all the rules regarding representative offices also apply to referral agreements. Referral agreements set forth the terms and conditions under which a local broker-dealer or financial corporation promotes the foreign entity’s securities-related products and services in Colombia. As with the establishment of a representative office, referral agreements must be approved by the Superintendence. However, the Superintendence’s approval process for referral agreements generally is less time-consuming than the establishment of a representative office. The applicable regulations establish safe harbor exceptions to these requirements for foreign financial entities wishing to promote their services in Colombia. For instance, multilateral agencies and foreign governmental entities arranging government-to-government financings are exempted from the representative office or referral agreement requirements. The same applies, subject to specific considerations, in the case of reverse solicitation and existing clients. III. Developments in the European Union* The European Union (EU) reacted to the challenges of the financial markets in 2010 by publishing a number of rules and proposals and by initiating reviews of existing directives and regulations. A. NEW EU RULES ON CREDIT RATING AGENCIES Credit Rating Agencies (CRAs) registered in the EU8 shall be regulated by the newly established European Securities and Markets Authority (ESMA), which shall be entitled to perform on-site inspections, launch investigations, and request information. Issuers of structured finance instruments such as credit institutions, banks, and investment firms will have to provide all other interested CRAs with access to the information they give to their * By Dr. Manfred Ketzer. http://ec.europa.eu/internal_market/securities/docs/agencies/list_en.pdf. 8. See List of Credit Rating Agencies Registered in Accordance with Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on Credit Rating Agencies (CRA Regulation), EUROPEAN COMM’N, http://ec.europa.eu/internal_market/securities/docs/agencies/list_en.pdf (last visited Jan. 12, 2011). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURITIES & CAPITAL MARKETS 259 own CRA, in order to enable them to issue unsolicited ratings.9 The Commission will decide in the coming year whether further measures shall be taken to regulate CRAs. B. REVIEW OF THE TRANSPARENCY DIRECTIVE 2004/109/EC In its report on the operation of the Transparency Directive 2004/109/EC,10 the European Commission identified several issues to improve the impact of the Directive. These include: adapting transparency rules to smaller listed companies to increase the attractiveness of being listed on a regulated market, such as more flexible deadlines for the disclosure of financial reports, alleviating the obligation to publish quarterly financial information, harmonizing the content of reports, and facilitating cross-border visibility of such companies to potential investors/intermediaries. The report also found insufficient disclosure of stock-lending practices that increase the risk of “empty voting” as well as a lack of disclosure of cash-settled derivatives that lead to “hidden ownership.” The report points out that existing rules in some Member States require large investors not only to disclose their intentions as regards their holdings but also how they financed the acquisition. C. PROPOSAL FOR A REGULATION ON SHORT SELLING AND CERTAIN ASPECTS OF CREDIT DEFAULT SWAPS The European Commission published this proposal (the “Proposal”) on September 15, 2010.11 The Regulation shall enter into force on July 1, 2012.12 On short selling, it provides for a flagging of short sale orders as well as disclosure obligations of significant net short positions in shares.13 Reaching or falling below the threshold of 0.2% (and each 0.1% above that) of the value of the issued share capital of the company concerned triggers a notification obligation to the relevant competent authority.14 If the net short position reaches or falls below 0.5% (and each 0.1% above that), the person shall disclose to the public details of the position.15 Rules on notification thresholds of significant net short positions in sovereign debt (not in shares) and credit default swaps (CDS) shall be set by the European Commission on a later date.16 Articles 5, 7, and 8 also apply to natural and legal persons residing or established outside the European Union.17 To enter 9. Press Release, European Comm’n, Commission Proposes Improved EU Supervision of Credit Rating Agencies and Launches Debate on Corporate Governance in Finance Institutions (June 2, 2010), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/656. 10. Operation of Directive 2004/109/EC on the Harmonisation of Transparency Requirements in Relation to Information About Issuers Whose Securities are Admitted to Trading on the Regulated Market, at 3(10), COM (2010) 243 final (May 27, 2010), available at http://ec.europa.eu/internal_market/securities/docs/transparency/directive/ com-2010-243_en.pdf. 11. Regulation of the European Parliament and of the Council on Short Selling and Certain Aspects of Credit Default Swaps, COM (2010) 482 final (Sept. 15, 2010), available at http://ec.europa.eu/internal_market/securities/docs/short_selling/20100915_proposal_en.pdf. 12. Id. art. 42. 13. Id. arts. 14-15. 14. Id. art. 5. 15. Id. art. 7. 16. Id. art. 8. 17. Id. art. 10. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 260 THE INTERNATIONAL LAWYER a short sale, an investor must have borrowed the instruments concerned, entered into an agreement to borrow them, or have an arrangement with a third party to locate and reserve them for lending so that they are delivered by the settlement date (at the latest four days after the transaction).18 This bans naked short selling. In times of “adverse events or developments which constitute a serious threat to financial stability or to market confidence in the Member State or one or more other Member States” and if “the measure is necessary to address the threat,” a national competent authority of a Member State may prohibit or impose conditions on short sales and other transactions, including with CDS.19 The newly established ESMA shall coordinate such measures and is entitled to intervene.20 IV. Developments in Germany* A. SHORT SALES Germany enacted new legislation on certain short sales and derivatives.21 Now, uncovered short sales are prohibited if they are (i) shares of German companies that are admitted to trading on a regulated market in Germany, (ii) shares of foreign companies that are exclusively admitted to trading on a regulated market in Germany, and (iii) sovereign bonds of Euro-zone countries (including their regional governments and local political subdivisions) that are traded on a regulated market in Germany.22 These prohibitions do not apply to intra-day short positions. Market makers, comparable liquidity providers and lead brokers, as well as transactions entered into to fulfil fixed price client transactions, are exempt from the prohibition.23 Certain net short positions24 in shares that are traded on a regulated market in Germany must be reported and disclosed. Exemptions apply in favor of market makers, comparable liquidity providers, and lead brokers.25 It is prohibited for protection buyers to enter into, or accede to, credit derivatives referencing debt of Euro-zone countries (including their regional governments and local political subdivisions) unless the credit derivative serves hedging purposes. Exemptions from such prohibition apply in favor of market makers and comparable liquidity providers. Following consultation with the German Federal Bank, the German Federal Financial Supervisory Authority (BaFin) is authorized to impose on a temporary basis further restrictions on financial instruments if necessary. In particular, BaFin may temporarily pro18. Id. art. 12. 19. Id. arts. 16-25. 20. Id. arts. 22-25. * By Dr. Hartmut Krause. 21. “Gesetz zur Vorbeugung gegen missbräuchliche Wertpapier- und Derivategeschäfte” of July 21, 2010; Bundesgesetzblatt 2010 part I p. 245 (July 26, 2010). 22. Wertpapierhandelsgesetz [Securities Trading Act], Sept. 9, 1998, BUNESGESETZBLATT [BGBL I] at 2708, § 30 h(1a), last amended by Gesetz [G], Nov. 19, 2010, BGBL. I at 1612 (Ger.), available at http:// www.BaFin.de/cln_171/nn_720786/SharedDocs/Aufsichtsrecht/EN/Gesetze/wphg__101119__en.html# Start. 23. Id. § 30h (2). 24. In case of 0.2% notification to BaFin; in case of 0.5% notification in Electronic Federal Gazette. 25. Wertpapierhandelsgesetz, BGBL I, § 30i. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURITIES & CAPITAL MARKETS 261 hibit (i) transactions in equity derivatives or Euro-zone sovereign bond derivatives if the underlying securities are admitted to trading or traded on a regulated market in Germany and if such derivatives synthetically replicate short sales of such securities, unless such derivatives are entered into for hedging purposes;26 and (ii) the execution of, or the accession to, currency derivatives referencing the Euro if the market value of such derivatives can be expected to rise in case of an exchange rate decline of the Euro, unless such derivatives are entered into for hedging purposes.27 B. DISCLOSURE OF EQUITY DERIVATIVES On September 22, 2010, the German Federal Government submitted to the German Parliament the draft bill “Act for the Strengthening of Investor Protection and the Improvement of Capital Market Efficiency.”28 At present, disclosure is limited to financial instruments29 granting their holders the right to unilaterally acquire, under a legally binding agreement, issued voting shares.30 Under the proposed new disclosure rules, return claims under securities loans and repurchase claims under repo transactions will become disclosable.31 The Act also will introduce disclosure of instruments “making it possible” for their holder to acquire shares.32 Therefore, disclosure will extend to (i) cash-settled instruments if the counterparty can hedge its risks under the instruments by holding the relevant shares,33 and (ii) instruments providing for physical settlement even if they do not confer the right to unilaterally acquire shares.34 The latter include physical call options subject to a condition beyond the control of the holder of the instrument, or physical put options. Disclosure is required if the underlying reaches, exceeds, or falls below any of the following thresholds: five percent, ten percent, fifteen percent, twenty percent, twenty-five percent, thirty percent, fifty percent, or seventy-five percent of the share capital. The percentage shall be determined based on the number of voting shares that the counterparty would have to hold at the time of the acquisition of the instrument to fully hedge its position. The hypothetical voting rights under such instruments shall be aggregated with the voting rights that are disclosable under current legislation.35 26. Id. § 4a (1)(1a). 27. Id. § 4a (1)(1b). 28. “Gesetz zur Stärkung des Anlegerschutzes und Verbesserung der Funktionsfähigkeit des Kapitalmarkts”, BTDrucks. 29. Wertpapierhandelsgesetz, BGBL I, § 2 (2b). 30. Id. § 25. 31. According to the materials; see BT-Drucks, supra note 28. 32. Draft Section 25a WpHG. 33. Draft section 25a (1) sentence 2 no. 1 WpHG. 34. Draft section 25a (1) sentence 2 no. 2 WpHG. 35. Wertpapierhandelsgesetz, BGBL I, § 25a (1). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 262 THE INTERNATIONAL LAWYER V. Developments in India* The Securities and Exchange Board of India (the SEBI) announced several reforms in 2010, including the following: A. FIRST ISSUE OF INDIAN DEPOSITORY RECEIPTS (IDRS) Standard Chartered PLC became the first company to raise approximately US$530 million in May 2010 by issuing IDRs in India. IDRs are instruments denoted in Indian Rupees created by Indian depositories that are held by overseas custodians against underlying equity shares of an issuing foreign company. It allows foreign companies to raise capital in India and Indian investors to own shares in foreign companies that are unlisted in India. B. CREATION OF THE ANCHOR INVESTOR CATEGORY In June 2009, a SEBI circular created the category of anchor investors, equivalent to a cornerstone investor, and governed their participation in IPOs. Later, the anchor investor rules were codified in new regulations. A portion of Indian IPO’s (usually fifty percent) is typically reserved for subscription by qualified institutional buyers (QIBs). Now, up to thirty percent of the portion reserved for QIBs can be allocated to anchor investors through a bidding process subject to a thirty-day lock-in. The regulations define anchor investors to include large investors such as mutual funds and banks as QIBs with a minimum application/bid value of Rs. 100 million (approximately US$2 million). According to the regulations, anchor investors are allowed to bid for shares one day before the issue opens to the public, and bidding must be completed on the same day. The price and the number of shares allotted to anchor investment also must be disclosed to the public before the issue opens the next day. The allocation to anchor investors is made on a discretionary basis by the issuer. The introduction of anchor investors is expected to reduce pre-IPO private placements and give confidence to retail investors to bid for securities in the public issue. Since the SEBI introduced the regulations allowing anchor investors, several Indian companies already have gone public with anchor investor backing. C. MINIMUM PUBLIC SHAREHOLDING NORMS The Ministry of Finance in June 2010 made it mandatory for all listed companies to maintain a minimum public shareholding of twenty-five percent of their paid-up capital within a period of three years from the date of the notification. Public sector companies (owned by the government) are required to maintain a minimum public shareholding of ten percent. Unlisted companies intending to list also are required to offer at least twenty-five percent at the time of listing except (i) when the post-issue capital of the issuer, calculated at offer price, is over Rs. 40,000,000 (Rs. four crores, or approximately US$ 900 million); and (ii) when public sector companies are involved that are required to offer at least ten percent at the time of listing. These norms are expected to benefit small * By Ajit Sharma. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURITIES & CAPITAL MARKETS 263 investors by increasing liquidity in the Indian markets and enhancing corporate governance. Prohibition on Protected Cell Companies (PCCs) and Segregated Portfolio Companies (SPCs) from being registered as Foreign Institutional Investors (FIIs). In April 2010, SEBI made it mandatory for all FII applicants to declare that they are not structured as PCCs and SPCs. FIIs must register with SEBI prior to making any investments in Indian securities. Through the April 2010 circular, SEBI has prohibited entities structured as PCCs and SPCs from being registered as FIIs. Further, in case an FII applicant is structured as a multi-class vehicle, SEBI requires it to declare that each class of shares is broad-based (defined to mean at least twenty investors with no investor holding over forty-nine percent). This move is expected to ensure that FIIs remain broad-based and do not represent the interests of certain investors only. VI. Developments in Malaysia* Effective from April 1, 2010, Malaysia has introduced the Securities Commission (Amendment) Act 2010,36 an amendment to the Securities Commission Act 1993.37 In order to enhance the investor confidence in the quality and reliability of audited financial statements, this amendment requires the Securities Commission (SC) to appoint an Audit Oversight Board (AOB) consisting of an executive chairperson and six non-executive members.38 The AOB members shall possess knowledge and experience in finance, business, or in any other relevant field.39 They must also be people of integrity and repute, who understand the responsibilities for and nature of financial disclosures by public interest entities, such as public listed companies, licensed financial institutions including insurance companies and banks, both traditional and Islamic.40 The AOB is responsible for registering qualified auditors of public interest entities defined above.41 “Qualified auditors” include, among others, those competent auditors who are approved by the Minister of Finance under Section 8 of the Companies Act 196542 and those who have not been convicted of any offense involving fraud or other dishonesty, or of any offense of harming the investors financially under any written law due to their dishonesty, incompetence or malpractice, or the conduct of discharged or undischarged bankrupts.43 Unless registered with the AOB, no one is allowed to practice the profession of auditor. A breach of this provision is punishable with a fine not exceeding one million ringgit (approximately US$3.3 million) or imprisonment for a period not exceeding five years or both.44 * 36. 37. 38. 39. 40. 41. 42. 43. 44. By Dr. Md Anowar Zahid. Securities Commission (Amendment) Act 2010, Act A1369 (Malay.). Id. Act 498. Id. act A1369, §§ 31B, 31C. Id. § 31C(3)(a). Id. § 31C(b)-(c). Id. § 31E(1)(b). Companies Act, 1965, Act 125 (Malay.). Securities Commission (Amendment) Act 2010, act A1369, § 31P. Id. § 31N. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 264 THE INTERNATIONAL LAWYER The AOB is empowered to prescribe auditing and ethical standards for auditors.45 It may also direct the Malaysian Institute of Accountants to establish or adopt such standards.46 The AOB shall monitor their compliance.47 To this end, the AOB shall conduct inspection programs including the assessment of audit reports prepared by auditors for public interest entities.48 If the inspection report shows that there has been a violation of any provision of this law, or condition imposed by the AOB, or notice or guideline imposed or issued by the SC, the AOB shall inquire into the matter.49 Findings against an auditor may result in the following actions: (i) directing to comply with relevant provisions, conditions, or guidelines; (ii) reprimanding; (iii) requiring steps to remedy the breach; (iv) requiring relevant professional education; (v) assigning a reviewer to oversee an audit undertaken by the concerned auditor; (vi) prohibiting the auditor from taking any public interest entity as a client; (vii) prohibiting him/her from auditing financial statements of any public interest entity; and (viii) imposing a penalty not exceeding five hundred thousand ringgits (approximately US $170,000).50 A person aggrieved by the AOB’s decision may appeal to the SC within thirty days from the date on which he/she has been notified of the decision.51 The SC may affirm, set aside, or substitute the AOB’s decision.52 For the purpose of paying the expenditure of the AOB, this law requires the SC to establish and administer the “Audit Oversight Board Fund.”53 After defraying expenditures, the SC shall invest the remainder of the fund,54 adding investment income to monies received from the Fund’s other sources, including personal contributions required by the Minister of Finance, auditors’ registration fees, and other charges or fines payable under this law.55 VII. Developments in New Zealand* As in 2009, New Zealand’s securities law and capital markets landscape experienced only incremental change in 2010. On April 28, 2010, the Minister of Commerce announced a new “super-regulator” for financial markets, to be known as the Financial Markets Authority (FMA).56 The FMA will consolidate the functions currently distributed across the Securities Commission, the 45. Id. § 31U. 46. Id. 47. Id. § 31E, 31U. 48. Id. § 31V. 49. Id. § 31W. 50. Id. § 31Z. 51. Id. § 31ZB. 52. Id. 53. Id. § 31H. 54. Id. § 31K. 55. Id. § 31H. * By David Quigg, John Horner and Asha Stewart. 56. Press Release, Hon. Simon Power, Minister of Commerce, Gov’t Announces “Super-Regulator” for Financial Markets (Apr. 28, 2010), available at http://www.beehive.govt.nz./release/government-announces%E2%80%98super-regulator039-financial-markets. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURITIES & CAPITAL MARKETS 265 Ministry of Economic Development (including the Government Actuary), and NZX. The FMA is to be operational by the first half of 2011.57 Formation of the FMA is in part a response to the collapse of numerous finance companies over the last few years. This run of failures has included the receivership of South Canterbury Finance, which was New Zealand’s largest locally-owned finance company, in August 2010.58 The Securities Commission has been busy with these failures, investigating various companies and their directors, and has laid criminal charges and issued civil proceedings in some cases.59 Other than the creation of the FMA, 2010 has been a year of “behind the scenes” work as the key regulators have moved towards the practical implementation of several key pieces of legislation. In particular: a. The Government is moving ahead with the full implementation of the Financial Advisers Act 2008. This Act, which is intended to be fully in force by the end of 2010,60 places minimum competence standards on financial advisers,61 as well as improving the quality and relevance of the disclosure that financial advisers are required to give to clients.62 b. The key operative provisions of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 came into force on December 1, 2010. Pursuant to this legislation, and subject to some exceptions, financial service providers who are ordinarily residents in New Zealand, or have a place of business in New Zealand, must be registered on the Financial Service Providers Register.63 The definition of “Financial Service Provider” is broad and includes:64 (1) Financial advisers and brokers; (2) Those who keep, administer, or manage money, securities, or investment portfolios on behalf of others; (3) Those who provide credit under a credit contract; and issuing and managing means of payment; (4) Those who participate in an offer of securities to the public, either as an issuer or promoter; (5) Those who enter into derivative transactions or trade in money market instruments and futures contracts on behalf of other persons; or (6) Those who act as an insurer. 57. Press Release, Hon. Simon Power, Minister of Commerce, Minister Welcomes Appointment of CEO for Super Regulator (Oct. 20, 2010), available at http://www.beehive.govt.nz./release/minister-welcomes-appointment-ceo-super-regulator. 58. Adam Bennett, Gov’t Pays $1.7bn to Sth Canterbury Finance, N.Z. HERALD, Aug. 31, 2010, http:// www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10670109. 59. See generally News Releases, SECURITIES COMM’N (N.Z.), http://www.seccom.govt.nz/new/releases/ 2010/ (last visited Jan. 24, 2011). 60. Press Release, Hon. Simon Power, Minister of Commerce, Gov’t Addressing Concerns Over Financial Advisers (Nov. 9, 2009), available at http://www.beehive.govt.nz/release/govt+addressing+concerns+over+financial+advisers. 61. Financial Advisers Act 2008 §§ 33, 37, 46, 2008 S.N.Z, No. 91, http://www.legislation.govt.nz/act/ public/2008/0091/latest/096be8ed80677368.pdf. 62. Part 2 of the Financial Advisers Act. 63. Financial Service Providers (Registration and Dispute Resolution) Act 2008 § 11, 2008, available at http://www.legislation.govt.nz/act/public/2008/0097/latest/096be8ed805e22ce.pdf. 64. Id. § 5. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 266 THE INTERNATIONAL LAWYER In order to register, a financial service provider must also belong to a dispute resolution scheme, unless the provider provides financial services only to wholesale clients, or unless it is considered to be a financial service provider only because it is an issuer or promoter participating in one or more offers of securities to the public, and doing so is not its only business.65 c. The Anti-Money Laundering and Countering Terrorist Financing Act 2009 was enacted in October 2009.66 This Act aims to bring New Zealand into line with international standards in this area.67 Regulations that will set out the detailed requirements of the legislation are currently being developed. A consultation paper was released on August 9, 2010, with submissions closing on September 6, 2010.68 Additional obligations under this Act for financial sector participants are likely. VIII. Developments in the United States A. INVESTOR PROTECTION A MAJOR FOCUS OF THE DODD-FRANK ACT* The Investor Protections and Improvements to the Regulation of Securities Act (IPIRSA) was signed into law on July 21, 2010. It is part of the much larger Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Dodd–Frank Act”). IPIRSA seeks to enhance investor protection through several reforms to existing securities laws, including the creation of two new entities within the Securities Exchange Commission (SEC), and a reformed award program for whistleblowers to incentivize disclosure of companies violating securities laws. 1. New Committees Created in the SEC to Bolster Investor Protection IPIRSA creates two new entities within the SEC: The Office of the Investor Advocate and The Investor Advisory Committee. These entities are designed to combat the “regulatory capture” that is perceived to exist in the industry. Regulatory capture is the phenomenon that occurs when a governmental agency that is supposed to regulate an industry begins to advocate for that industry due to their close working relationship, often with a harmful effect upon the people that agency is supposed to protect—for the SEC, common investors.69 The Investor Advisory Committee (IAC) is an entity added by IPIRSA under the Securities Exchange Act of 1934.70 The IAC has a broad mandate and functions primarily to advise the SEC on matters of concern within the different securities markets.71 The IAC 65. Id. § 48. 66. Anti-Money Laundering and Countering Terrorist Financing Act 2009, available at http:// www.legislation.govt.nz/act/public/2009/0035/latest/096be8ed805bc1f5.pdf. 67. Press Release, Hon. Simon Power, Minister of Commerce, Parliament Passes Law on Money Laundering (Oct. 15, 2009), available at http://www.beehive.govt.nz/release/parliament¶asses+lawōney+laundering. 68. AML/CFT Regulations Consultation Document, MINISTRY OF JUSTICE (N.Z.), Aug. 9, 2010, http:// www.justice.govt.nz/publications/global-publications/a/aml-cft-regulations-consultation-document/aml-cftregulations-consultation-document. * By Justin Schluth. 69. Aguirre v. SEC, 551 F. Supp. 2d 33, 56 (D.D.C. 2008). 70. Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. § 39 (2011). 71. Id. § 78a et seq. § 39 (a). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURITIES & CAPITAL MARKETS 267 is also supposed to amass and produce a report that contains a summary of individual investor views on regulatory issues that are not related to the enforcement of the SEC provisions. The report will focus mainly on the current regulatory concerns stemming from new rules and regulations. The IAC has a board of anywhere from ten to twenty members, including a representative for senior citizen investors, a representative for state securities regulation, and other members appointed at the discretion of the SEC to represent investors and institutional investors.72 The Office of the Investor Advocate (OIA) is the second entity created under the Securities Exchange Act of 1934.73 The OIA is appointed by and reports to the Chairman of the SEC, and is to act as a liaison between individual investors and the SEC.74 The OIA’s primary purpose is to help investors resolve the issues that arise between them and the SEC, including informal resolutions to problems.75 The OIA is also designed to alert the SEC Chairman of concerns that individual investors have. That duty includes suggesting and commenting upon regulatory changes that would benefit the individual investor. The final major duty of the OIA is to analyze and report to the Chairman how proposed rules and regulations affect individual investors and offer suggestions to the SEC that would address investor concerns in the most effective way. This entity, though part of the SEC, is supposed to be independent and focus on the needs of private investors by giving those investors a larger voice within the SEC. 2. Expanded Whistleblower Bounty Program One of the most interesting additions implemented by IPIRSA is the ability for the SEC to reward whistleblowers for successful enforcement actions. The whistleblower bounty program is instituted under the Securities Exchange Act of 1934.76 Under IPIRSA, if a whistleblower provides the SEC with original information that leads to a successful enforcement action with a sanction of greater than $1 million, the SEC may award the whistleblower up to thirty percent of sanctions imposed,77 and must award at least ten percent of the total sanction imposed if all IPIRSA’s requirements are met.78 Although the bounty program is not new, the SEC rarely used this power in the past.79 The awards that are given to whistleblowers under this section are paid out of a fund created in this portion of IPIRSA.80 72. Id. § 78a et seq. § 39 (b). 73. Id. § 78d (g). 74. Id. § 78d (g)(2). 75. Id. § 78d (g)(4). 76. Id. § 78a et seq. § 21F. 77. Id. § 78a et seq. § 21F (a)(1), (a)(3)-(4). 78. Id. § 78a et seq. § 21F (b). 79. Id. § 78u-1(e). 80. Id. § 78a et seq. § 21F (g). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 268 THE INTERNATIONAL LAWYER B. NEW SEC RULES UNDER DODD-FRANK ON “CONFLICT MINERALS” AND “EXTRACTIVE INDUSTRIES”* The Wall Street Reform and Consumer Protection Act (the “Act”)81 was enacted into law on July 21, 2010, and will have far-reaching effects on the regulation and supervision of the U.S. financial system. The Act includes various changes that will affect public companies and companies hoping to access the U.S. securities markets. Among other things, companies with overseas operations, particularly in the extractives industry, will face new SEC disclosure requirements under the Act. In an effort to expand transparency and try to “name and shame” multinational companies whose activities could be seen as linked to conflict minerals or to corrupt governments abroad, Title 15 of the Act includes provisions which will require such companies to provide increased SEC disclosure. The Act requires the SEC to promulgate rules that will require additional disclosures from certain companies, most likely in the annual reports that public companies with securities registered under the Securities Exchange Act of 1934 file with the SEC.82 (Generally, Form 10-K is required for domestic companies, and Form 20-F is required for nonU.S. companies that meet the definition of a “foreign private issuer.”) Section 1502 of the Act83 directs the SEC to require certain disclosure from any public companies whose products contain so-called conflict minerals or for whose products conflict minerals are necessary to operate. Under the Act, and as will be detailed in the new rules, “conflict minerals” consist of the following or their derivatives: cassiterite (the major ore used in making tin), columbite-tantalite (or “coltan,” also know as iron manganese, used in the manufacture of condensers, micro-electronic technology—chips and processors, cell phones, nuclear reactors and highly heat-tolerant varieties of steel), wolframite (the principal ore in tungsten which is used in many electrical items), and gold. Under the rules, these companies will need to disclose annually whether they are sourcing these minerals from the Democratic Republic of Congo (the “DRC”) or adjoining countries: Angola, the Republic of Congo (Brazzaville), the Central African Republic, the Sudan, Uganda, Rwanda, Burundi, Tanzania, and Zambia. Where such minerals are being sourced from these countries, companies must report to the SEC on the measures that the company has taken to exercise due diligence on the source and chain of custody of the minerals. This report must include an independent private sector audit conducted in accordance with standards established by the U.S. Comptroller General. Similarly, section 1504 of the Act84 directs the SEC to require any company that is required to file an annual report with the SEC and that engages in the commercial development of oil, natural gas, or minerals to include in such annual report information relating to any payment that the company, any subsidiary, or any entity under the control of the company has made to a foreign government or the U.S. government for the purpose of the commercial development of oil, natural gas, or minerals. The Act also specifies that * By Walter G. Van Dorn, Jr. and Jeffrey R. Krilla. 81. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). 82. See Securities and Exchange Act of 1934, 15 U.S.C. § 78m(a)(2). 83. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1502. 84. Id. § 1504. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW SECURITIES & CAPITAL MARKETS 269 the information required to be disclosed in the annual report must be provided in “interactive data format” and must include electronic “tags” that identify certain aspects of the payments. Under the Act, SEC rules enforcing these mandates are due by April 17, 2011, with reporting obligations to arise in each company’s first full fiscal year commencing after the rules are issued.85 Thus, for calendar-year companies, the new disclosure obligations would pertain to activities in 2012, and such companies would need to file 2012 annual reports containing the newly-required disclosures in early 2013. 85. Id. §§ 1502, 1504. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Islamic Finance PIERRE M. GAUNAURD, HDEEL ABDELHADY, AND NABIL A. ISSA* I. Case Law Update* A. APPOINTMENT OF ARBITRATORS DISCRIMINATION LAWS (FOR IN NOW. ENGLAND SUBJECT TO ENGLISH ANTI- . .) In June 2010, the English Court of Appeal ruled in Jivraj v. Hashwani that the appointment of arbitrators by private parties must comply with the English Equality (Religion and Belief) Regulations 2003, which prohibit discrimination in employment (the “EER”).1 The decision partially reversed a 2009 judgment in the same case, in which the High Court of Justice ruled that neither arbitrators nor their appointments are protected under the EER, because arbitrators are not “employees” and the arbitrator-litigant relationship is not an “employment” relationship.2 Jivraj arose out of an English law-governed joint venture agreement containing an arbitration clause requiring that “all arbitrators . . . be respected members of the Ismaili [Muslim] community.”3 The parties were Messrs. Jivraj and Hashwani, both members of the Ismaili Community.4 In 2008, Hashwani appointed an arbitrator who was not a member * Pierre M. Gaunaurd, Co-Chair of the Islamic Finance Committee, served as committee editor. Hdeel Abdelhady, attorney, Professorial Lecturer in Law at the George Washington University Law School in Washington, D.C., and Co-Chair of the Islamic Finance Committee, authored Sections I and II of this article. Section III was written by Nabil A. Issa, a partner based in the Dubai and Riyadh affiliated offices of King & Spalding LLP. The opinions expressed in Part III do not necessarily reflect the opinions of King & Spalding. Mr. Issa thanks Alfred Zelhof (summer associate in the Dubai office, LL.B. Candidate BPP Law School London) for his assistance. * Contribution by Hdeel Abdelhady. 1. Jivraj v. Haswani, [2010] EWCA (Civ) 712, [30] (Eng.), available at http://www.bailii.org/cgi-bin/mark up.cgi?doc=/ew/cases/EWCA/Civ/2010/712.html&query=title+(+jivraj+)&method=boolean [hereinafter Jivraj II]. 2. Jivraj v. Hashwani, [2009] EWHC (Comm) 1364, [38] (Eng.), available at http://www.bailii.org/cgi-bin/ markup.cgi?doc=/ew/cases/EWHC/Comm/2009/1364.html&query=title+(+jivraj+)&method=boolean [hereinafter Jivraj I]. For a more detailed discussion of Jivraj I, see Hdeel Abdelhady, Islamic Law in Secular Courts (Again): Teachable Moments From the Journey, 38 INT’L L. NEWS No. 4 (2009), reprinted at Opalesque Islamic Finance Intelligence December 2009, available at http://www.opalesque.com/OIFI137/Industry_Snapshot_ Islamic_Law_in_Secular_Teachable197.html. 3. Jivraj II, [2010] EWCA (Civ) 712, [2]. 4. Id. 271 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 272 THE INTERNATIONAL LAWYER of the Ismaili Community, and Jivraj sought a court order declaring the appointment invalid.5 A dispute as to the legality of the arbitration clause ensued. The EER prohibit religion-based discrimination in employment, except where “being of a particular religion or belief is a genuine occupational requirement.”6 The appellate court construed the EER broadly to determine that “employment” encompasses any “contract personally to do work of any kind.”7 Being contract-based, the arbitrator-litigant relationship is subject to the EER, and arbitrators cannot be denied appointment based on religion.8 The genuine occupational requirement exception was inapplicable because membership in the Ismaili Community was not required to carry out the role of arbitrator, which was to determine the dispute under English law.9 The court invalidated the arbitration clause in its entirety.10 The Jivraj case highlights tensions between the legal and policy prerogatives to provide relative freedom, independence, and privacy in dispute settlement through arbitration, on the one hand, and stamping out unlawful discrimination, on the other.11 In November 2010, the Supreme Court of the United Kingdom granted leave to appeal in the case.12 The case is being watched closely by the international arbitration community, whose members have expressed concern that the appellate court decision in Jivraj will have adverse consequences for international arbitration in London.13 5. Id. at [3]-[4]. 6. Id. at [5]. In Jivraj I, the court noted that even if the EER had applied, the requirements of the genuine occupational requirement exception would have been met, as membership in the Ismaili Community was a bona fide occupational requirement. Jivraj I, [2009] EWHC (Comm) 1364, [45]. 7. Jivraj II, [2010] EWCA (Civ) 712, [9], [17] (reasoning that the EER are patterned on earlier antidiscrimination in employment legislation that defines employment broadly). 8. Id. at [25]. 9. Id. at [29]-[30]. Importantly, had the arbitration clause authorized the arbitral tribunal to sit in equity, the requirement of membership in the Ismaili Community might have been justified under the bona fide occupational requirement exception. Id. at [29]. 10. Id. at [26], [34]. The offensive language could not be severed from the remainder of the arbitration clause because it was “an integral part of the agreement to arbitrate.” Id. at [34]. This part of the decision was in accord with Jivraj I. Id. 11. The lower court remarked that the interest in ensuring parties’ freedom “to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest” favored the application of the genuine occupational requirement exception. Jivraj I, [2009] EWHC (Comm) 1364, at [46] (quoting Section I of the Arbitration Act 1996). 12. UK Supreme Court, Applications for Permission to Appeal, available at http://www.supremecourt.gov. uk/docs/PTA-1011.pdf (last visited Dec. 2010). 13. The International Chamber of Commerce and the London Court of International Arbitration intervened in support of the application for leave to appeal to the Supreme Court. Tom Toulson, Leave to Appeal Granted in Jivraj, GLOBAL ARB. REV., Nov. 23, 2010, available at http://www.globalarbitrationreview.com/ news/article/28932/leave-appeal-granted-jivraj/. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ISLAMIC FINANCE 273 II. Corporate Governance in Islamic Finance* A. THE FRONT OFFICE GENERATES REVENUE, THE OPERATIONAL EXCELLENCE UNLOCKING LASTING VALUE IN IS THE KEY TO BACK OFFICE CREATES VALUE: ISLAMIC FINANCE It is not righteousness that ye turn your faces towards East or West; But it is righteousness to believe in Allah and the Last Day, and the Angels, and the Book, and the Messengers; To spend of your substance, out of love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those who ask, and for the ransom of slaves; To be steadfast in prayer, and practice regular charity, to fulfill the contracts which ye have made; And to be firm and patient, in pain (or suffering) and adversity, and throughout all periods of panic. Such are the people of truth, the God-fearing. -The Noble Qur’an, 2:177 The quoted Qur’anic aya (verse) crystallizes a fundamental Islamic value: form does not trump substance, and outward adherence to religious injunctions does not, without more, equal piety.14 Rather, piety is measured by deeds motivated by sincere faith, whether perceptible or imperceptible to others. The significance of this verse for individual Muslims is clear. Moreover, it applies to institutions that hold themselves out to the public as “Islamic,” whether in the form of Islamic banks, Islamic windows of conventional banks, or other providers of Islamic financial products and services, such as takaful and financial advisory. Islamic Financial Institutions (IFIs) must ensure that behind the scenes, in their back offices, their operations are of a quality that ensures that representations about the nature of their business model, products, services, and commercial and legal objectives are true to the religion-derived principles to which they owe their market share. This requires operational excellence in the back offices of IFIs, which must be facilitated and reinforced at the industry level. Operational excellence is the key to unlocking lasting value in Islamic Finance. This note discusses two published court opinions involving IFIs—The Investment Dar v. Blom (Blom) and Shamil Bank of Bahrain EC v. Beximco Pharmaceuticals Ltd. (Shamil)—and IFI Shari’ah Board Reports and their implications for governance and brand management.15 In this note, the notions of operational quality and governance are broad, and are used interchangeably. * Contribution by Hdeel Abdelhady. 14. This aya (verse) appears in Surat Al Baqara, Chapter Two of the Holy Qur’an. Surat Al Baqara, comprised of 286 ayat (verses), is the longest Chapter in the Qur’an and is said to sum up “the whole teaching of the Qur’an.” ABDULLAH YUSUF ALI, THE MEANING OF THE HOLY QUR’AN 16 (Amana Publ’n, 11th ed., 2004). 15. Inv. Dar Co. KSCC v. Blom Dev. Bank SAL, [2009] EWHC (Ch) 3545 (Eng.), available at http://www. bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/Ch/2009/3545.html&query=title+(+blom+)&method= boolean; Shamil Bank of Bahrain EC v. Beximco Pharm. Ltd., [2004] EWCA (Civ) 19, [2004] All E.R. 1072 (Eng.), available at http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWCA/Civ/2004/19.html& query=title+(+shamil+)&method=boolean. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 274 THE INTERNATIONAL LAWYER 1. The Need for Operational Excellence in Islamic Finance is Particularly Compelling The financial crisis and other well-known governance failures (recall Enron) are powerful reminders of a universal truth. Rules, whatever their source, are only as good as their enforcement. Laws alone are insufficient to prevent practices motivated by short-term gain to the detriment of long-term value. This is particularly true for Islamic Finance, which operates globally without comprehensive industry-specific regulation, making external regulatory checks on governance moderate to non-existent. Further, the nature of the relationship between IFIs and consumers of their products and services, based on the Islamic profit and loss sharing (PLS) construct, requires that IFIs be operationally strong to maximize returns for consumers and shareholders.16 IFIs, owning their existence to a religion-based ethical model, must be, and must convincingly appear to be, ethical. Vigilant self-governance is required to preserve the Islamic brand, maximize profitability, and fill legal and regulatory gaps.17 2. Governance Shortfalls Revealed: Case Studies In the last paragraph of the well-known February 2008 Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI’s) clarification on sukuk, AAOIFI’s Shari’ah Board advised IFIs “to decrease their involvement[ ] in debt-related operations and to increase true partnerships based on profit and loss sharing in order to achieve the objectives of the Shari’ah.”18 The advice, seemingly a postscript to AAOIFI’s sukuk clarifications, is broad in scope and applicability, and has ramifications for governance at the institutional and industry levels. Published court opinions and Shari’ah Board Reports (SBRs) issued by IFIs shed light on areas in which to improve operational quality. Although court opinions and SBRs are, by their nature, specific to institutions and situations, they have industry-wide ramifications.19 a. The Blom Case In Blom, The Investment Dar (TID), an IFI, asserted its own failure to comply with Shari’ah as a defense to an apparently valid demand for payment by Blom Development Bank (BDB). TID’s Memorandum of Association prohibited its engagement in “any 16. Consumers of Islamic financial products are more akin to equity investors, partners, and co-venturers than they are to consumers of conventional debt-based products. In assessing equity-based investments and ventures, the soundness of management and operations figures prominently. The quality of the management and operations of IFIs should figure equally prominently in the assessment of Islamic products. 17. A survey of Islamic Finance leaders in the Middle East revealed that sixty-six percent of survey respondents believed that the Islamic Finance industry is “under-regulated.” The Deloitte Islamic Finance Leaders Survey in the Middle East, Benchmarking Practices, DELOITTE, 12 (2010), http://www.deloitte.com/assets/ Dcom-Lebanon/Local%20Assets/Documents/FSI/DTME_IFLS_publication_23092010.pdf [hereinafter Deloitte Survey]. 18. Resolution on Sukuk, ACCT. & AUDITING ORG. FOR ISLAMIC FIN. INST., (Feb. 2008), http://www.aaoifi. com/aaoifi_sb_sukuk_Feb2008_Eng.pdf. 19. Indeed, only fifty-nine percent of respondents to the Deloitte Survey stated that the entities they represented had in place “corporate governance/procedures,” while thirty-nine percent did not. Deloitte Survey, supra note 17, at 11. At the same time, fifty-eight percent of survey respondents “view[ed] corporate governance and Sharia’a governance as prerequisites for best practices.” Id. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ISLAMIC FINANCE 275 usury or non-Sharia compliant activities.”20 In October 2007, TID and BDB entered into a wakala agreement, pursuant to which BDB deposited US$10 million with TID as its agent, for Shari’ah-compliant investment in TID’s “treasury pool.”21 TID’s Shari’ah Board previously approved the TID-BDB transaction and the form of the master wakala agreement.22 TID failed in its payment obligations and BDB filed suit in English court (pursuant to English forum and governing law clauses). After an initial hearing, BDB won summary judgment for US$10 million, the principal amount deposited. TID sought permission to appeal the summary judgment, arguing, inter alia, that a full trial was required to determine whether the wakala was enforceable. According to TID, the wakala was interest-bearing, not Shari’ah-compliant, and therefore unenforceable because TID did not have the legal capacity to enter into the wakala.23 Subsequently, TID’s Shari’ah Board issued a statement asserting that the transaction was Shari’ah-compliant, and advised TID to abandon its appeal against BDB.24 b. The Shamil Case The Shamil dispute arose out of two murabaha and related agreements between Shamil Bank of Bahrain and Beximco Pharmaceuticals, its corporate affiliates, and directors (collectively, Beximco).25 Beximco defaulted on its obligations, and Shamil Bank brought a claim in English court, pursuant to English governing law and forum selection clauses. Shamil Bank prevailed both at trial and on appeal.26 Shamil Bank’s Shari’ah Board certified the disputed transactions before the litigation. Nevertheless, at trial, Beximco argued that the murabaha and related agreements with Shamil Bank were interest-bearing loans with Islamic names. The English court appeared to accept this characterization, stating that: “if the Sharia law proviso were sufficient to incorporate the principles of Sharia law into the parties’ agreements, the defendants would have been likely to succeed.”27 Due to a governing law clause that did not effectively incorporate Shari’ah as a source of governing principles, however, it cannot be known whether the court’s prediction of a favorable outcome for Beximco would have materialized, had Shari’ah applied. 3. Addressing Governance Shortfalls at the Institutional Level a. Instruments Susceptible to a Shari’ah Challenge • Innovation in Islamic Finance: Back to Basics. Blom and Shamil involve agreements that were characterized by litigants as effectively interest-bearing, and repugnant to Shari’ah. These characterizations, accurate or not, raise a frequently asked question about whether Islamic Finance has innovated sufficiently to meet con20. Blom Dev. Bank, [2009] EWHC (Ch) 3545, [3]. 21. Id. at [1]-[2], [5]-[6]. 22. Id. at [16]–[17]. 23. Id. at [16]. 24. See Shaheen Pasha, Investment Dar Gets Sharia Board Blow to Blom Case, ARABIANBUSINESS, June 9, 2010, http://www.arabianbusiness.com/investment-dar-gets-sharia-board-blow-blom-case-282707.html. 25. See Shamil Bank, [2004] EWCA (Civ) 19, [11]-[12]; see also Abdelhady, supra note 2, at 18, 19. 26. See Shamil Bank of Bahrain v. Beximco Pharm. Ltd., [2003] EWHC (Comm) 2118, [58], [2003] 2 All E.R. (Comm) 849 [hereinafter Shamil I]; see Shamil Bank, [2004] EWCA (Civ) 19, [61]-[63]. 27. Shamil Bank, [2004] EWCA (Civ) 19, [55]. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 276 THE INTERNATIONAL LAWYER sumer demand, develop and expand its market share, and bolster Shari’ah compliance. Much has been written on the subject of innovation, and Shari’ah experts, business professionals, and economists would best pave the way forward. For the purposes of Part I, it is sufficient to state that IFIs and the Islamic finance industry should revisit the issue of whether the “bank” operating model assumed by many IFIs is congruent with the Islamic PLS model. • Owing to real commercial pressures, IFIs frequently use off-the-rack instruments (e.g., murabaha, wakala, and tawarruq) that have been susceptible to Shari’ah challenges because, as implemented, they most directly compete with the term loans, fixed return investment instruments, and treasury products used by their conventional counterparts. IFIs are, after all, for-profit entities, and their responses to real commercial pressures are understandable. However, it is reasonable to question whether the continued reliance on products that are readily susceptible to accusations of Shari’ah violations and innovation shortcomings are in the best long-term interest of IFIs and the industry. More important, the widespread use of such instruments, to the exclusion of innovative Islamic PLS-based offerings, denies the industry the opportunity to know and capitalize on its true potential market share, as many consumers will avoid products that appear to be Islamic in name only. • Ensuring Shari’ah Compliance, From Cradle to Grave. The Blom and Shamil cases both involved claims that “Islamic” agreements were effectively interest-bearing. Such accusations, if made frequently and publically, undoubtedly will have damaging effects for specific IFIs and the industry at large. IFIs must ensure that their instruments and transactions are structured, documented, and executed in a manner that minimizes the risk of Shari’ah challenges. This means that the letter and spirit of fatawa, forms of agreements, and transaction structures reviewed and approved by Shari’ah Boards must not be altered over the course of their lifetime, unless re-submitted and re-reviewed for Shari’ah compliance. Coordination and vigilance across operational units (e.g., management, compliance and legal, risk management, and transaction teams) is essential to ensure that the Shari’ah character of instruments remains intact after Shari’ah Board approval. b. Managing Litigation and Derivative Commercial Risk • Legal Risk Management Should Reflect Sound Governance. Legal risk is as much a part of doing business as commercial risk, and legal risk management is part of corporate governance. IFIs (like other entities) must conduct their affairs in a manner that demonstrates an appreciation of legal risk, before legal disputes arise. As a matter of policy, legal risk and litigation management protocols should be written, periodically reviewed (internally and with outside counsel), and explained and disseminated to IFI personnel at regular intervals. Well-crafted protocols should address, among other issues: (1) internal approvals and considerations necessary when deciding to proceed with litigation (e.g., based on the nature of disputes, amount in controversy, likelihood of publicity, etc.); (2) forum type (e.g., arbitration, mediation, national courts); (3) jurisdiction (considering, e.g., quality of courts, typical duration of litigation, expense, and ability to adjudicate substantive issues); (4) governing law; (5) likelihood and extent of commercial risk attendant to litigation strategy; (6) internal document retention and record-keeping procedures; and (7) VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ISLAMIC FINANCE 277 the ability to produce evidence.28 Legal risk and litigation management protocols should facilitate informed decisions about litigation, including whether commercial risks outweigh the potential benefits of a legal strategy. • Sound Legal Risk Management Requires Coordination Across Back Office Functions. The Blom case presents a striking example of the harm that can result from a lack of coordination in making litigation decisions. The assertion in court of Shari’ah-non-compliance by an IFI whose constitutional documents prohibit its engagement in Shari’ah-non-compliant transactions is remarkable, to say the least.29 Where Shari’ah compliance is potentially subject to dispute, the IFI’s Shari’ah Board should be asked to review, with the assistance of legal counsel and relevant departments, germane documentation and transaction history and assess Shari’ah merits before any litigation strategy is pursued. The wisdom of this approach is borne out by the TID Shari’ah Board’s untimely advice that TID abandon its legal dispute with BDB. • Evidentiary Inadequacy of Post Hoc, Wholesale Certification of Islamic Transactions. In the Shamil case, Shamil Bank submitted year-end SBRs as proof that the disputed transactions with Beximco had been “certified” by its Shari’ah Board. The certifications were not specific to the Shamil-Beximco transactions. The SBRs stated: “The Board believes that all the bank’s business throughout the said year, including investment activities and banking services, were in full compliance with Glorious Islamic Sharia’a.”30 The evidentiary value of the certifications was not scrutinized because Shari’ah principles were not applied to decide the case. As a general matter, IFIs should be aware that such post hoc, sweeping certifications (in SBRs or otherwise), without more, might not be sufficient proof of Shari’ahcompliance or adequacy of Shari’ah oversight in litigation or in other contexts. With this in mind, IFIs should consider whether internal records of Shari’ah approval, review, and compliance are of a type and quality that would evidence Shari’ah-compliance in litigation or other contexts. A good record keeping and retention policy should address such issues. • Governing Law and Forum Selection Should Demonstrate Commitment to Shari’ah-Compliance. Many parties to Islamic Finance contracts select secular (e.g., English) law and courts in their governing law and forum selection clauses, for good reason. Jurisdictions outside of the Islamic Finance hub provide the transparency and predictability necessary for effective dispute resolution. At the same time, however, as was the case in Shamil, secular courts will often refuse to apply Shari’ah, apply it in a limited fashion, or are ill-equipped to interpret Shari’ah even if applied.31 IFIs should draft their governing law and forum selection clauses to en28. Where agreements call for litigation before national courts, as in the Blom Dev. Bank and Shamil Bank cases, the likelihood of a published opinion (particularly at the appellate stage) is high. On the other hand, if parties have opted for arbitration, the likelihood of a published opinion is slim to none, depending on the terms of arbitration, e.g., the forum selected, procedural rules, and confidentiality provisions, etc. 29. Note also that TID had a Shari’ah-based obligation to fulfill the contract that it made. See, e.g., Surat al Baqara 2:177. 30. Shamil Bank, [2004] EWCA (Civ) 19, [8]. 31. In Shamil Bank, the disputed agreement contained a governing law provision stating that: “Subject to the principles of the Glorious Sharia’a, this agreement shall be governed by and construed in accordance with the laws of England.” Id. at [1]. The English court did not apply Shari’ah, because under English law, the law SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 278 THE INTERNATIONAL LAWYER sure that Shari’ah principles are applied to decide the substantive elements of legal disputes. The use of governing law clauses that effectively incorporate Shari’ah is in the interest of IFIs and the industry generally. If Islamic Finance cases continue to be decided under secular law, to the exclusion of Shari’ah, legal ambiguity will continue to hinder sustainable long-term growth because of legal uncertainty. Separately, IFI-drafted governing law clauses that have the foreseeable effect of excluding Shari’ah suggest a lack of commitment to Shari’ah and its enforcement. As the trial judge noted in Shamil: “The English court, as a secular court, is not suited to ascertain and determine highly controversial principles of religious-based law and it is unlikely that the parties would be satisfied by any such ruling; that is not what they were wanting by their choice of law clause.”32 c. Shari’ah Board Reports: Disclosure Quality and Brand Management As succinctly stated by the Islamic Financial Services Board (IFSB): “Compliance with Shari’ah rules and principles is the raison d’être of the Islamic Financial Services Industry.”33 SBRs issued by IFIs should reflect this existential truth, in two ways. First, IFIs should ensure that their SBRs fully describe the Shari’ah governance apparatus in place, to communicate to consumers, shareholders, regulators, and the public, the importance and role of Shari’ah governance at the IFI level. Second, SBRs are an excellent marketing medium for IFIs, and they should be used to bolster the Islamic brand. • Bolster the Level of Disclosure in SBRs. IFI SBRs tend to share a common structure. First, they state that operations complied with applicable fatawa and Shari’ah generally. Second, they assure readers that all profits derived from nonShari’ah-compliant transactions were set aside and paid as zakat (charity). Third, SBRs usually reiterate that responsibility for governance, including Shari’ah governance, rests with IFI management. Fourth, SBRs typically state that the Shari’ah Board discharged its oversight functions based on information and documentation (e.g., audit reports) provided by IFI management. Finally, the signatories of SBRs often are scholars known to have held multiple Shari’ah Board positions during the reporting year. These five common features highlight places where disclosure can be enhanced, along the following lines: ° Additional details regarding the nature of the Shari’ah governance apparatus in place (e.g., the manner in which Shari’ah-compliance audits are conducted and their frequency, and clarity as to whether the Shari’ah Board itself reviewed documentation [e.g., by sampling] or relied on summaries of documentation). ° More information about the human, technological, and departmental resources that are devoted to Shari’ah-compliance, etc., and their place in the IFI’s organizational structure. of decision in English courts must be a law of another country, and not a “non-national” system of law. Id. at [40]. Therefore, the Shamil Bank case was decided under English law, even though, as noted, the English Court in that case commented that the outcome likely would have been different if Shari’ah had applied. Id. at [55]. 32. Shamil I, [2003] EWHC (Comm) 2118, [36]. 33. Guiding Principles on Shari’ah Governance Systems for Institutions Offering Islamic Financial Services, ISLAMIC FIN. SERV. BD., 1 (2009), http://www.ifsb.org/standard/IFSB-10%20Shariah%20Governance.pdf. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ISLAMIC FINANCE 279 ° The setting aside of improperly gained profits is itself an element of Shari’ahcompliance. However, disclosures of such instances must be reasonably explained and accompanied by details of remedial measures that were or will be implemented to avoid or reduce instances of non-compliance in the future. • The SBR as Marketing Tool. SBRs serve necessary (and, in jurisdictions where they are required by regulation, mandatory) functions. They also should be used proactively as marketing tools. SBRs provide IFIs with a rare opportunity to educate a diverse pool of readers about the nature of their business model and objectives and to differentiate their brand. Using SBRs as effective marketing tools requires that they be written eloquently and thoroughly, to achieve the purpose of informing readers about the importance of Shari’ah governance, the Shari’ah governance processes in place within the publishing IFI, the commercial and ethical objectives of Islamic Finance, and distinctions between IFIs and their conventional counterparts. d. The Role of Shari’ah Boards • Empowering Shari’ah Boards. Shari’ah Boards sit at the narrow apex of the Shari’ah compliance pyramid. They make and interpret the rules, and they are charged with a degree of oversight. However, with few exceptions, they are not fulltime employees of the IFIs that they serve. IFIs must ensure that Shari’ah Boards are equipped with the resources necessary to discharge their duties. Such resources might include assigning full-time, dedicated Shari’ah governance personnel (e.g., legal counsel, compliance professionals, accountants, etc.) with responsibility for reviewing documentation, audit reports, and transactions on a regular basis. Such dedicated Shari’ah Board personnel should report directly to the Shari’ah Boards that they serve, and should have a meaningful degree of independence from other operating units of IFIs. 4. Industry-Level Facilitative Measures: Building a Specialized Legal Infrastructure Many industry participants and observers have called for binding standardization to promote predictability and transparency in Islamic Finance. Whether standardization is a feasible and wise option in the near-term is open to debate. In the meantime, other measures can be taken to promote predictability and transparency. • Facilitate Development of Contemporary Islamic Economic Law. Shamil and Blom are two of many cases involving IFIs that have been tried in secular courts. Frequent and widespread resort to secular fora, over the long term, will stunt the development of contemporary Islamic economic law. As demonstrated by the Shamil case, secular courts will not always apply religion-derived law to settle disputes. The result is that modern Islamic economic instruments are not being scrutinized under the laws with which they purport to comply, thus perpetuating legal ambiguity. • Specialized Dispute Resolution Fora. As Islamic Finance continues to grow, so will the number of disputes. The need is clear for specialized fora to resolve Islamic Finance disputes, accommodate parties, and facilitate the transparent development of contemporary Islamic economic law. The accumulation of legal decisions through such fora would engender standardization of norms, without the potentially SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 280 THE INTERNATIONAL LAWYER negative consequences of standardizing rules based on insufficient industry experience. Of course, any such specialized fora, to be viable, must offer a degree of transparency, predictability, and efficiency on par with English and other secular systems, with the much-needed benefit of substantive Shari’ah expertise. • Shari’ah Expert Vetting, Training, and Roles. In the Shamil case, as in others involving Islamic law and tried in secular fora, the services of Islamic legal experts were utilized.34 So long as Islamic legal experts are needed, the Islamic Finance industry has an interest in ensuring that persons acting as Islamic banking and finance experts are qualified. Relatively modest measures can be taken to promote and maintain quality among experts; for example, training and certification programs, and the creation of an expert registry through such programs. Of course, oversight would be necessary to ensure that such measures do not have the undesirable effect of excluding any alternative Shari’ah interpretations or points of view, as long as competency is guaranteed. B. CONCLUSION Without question, contemporary Islamic Finance has grown tremendously in a short period of time. This growth and the raised visibility that has accompanied it present challenges and opportunities. Islamic Finance has reached the point of maturity at which introspective questions about its essence and place in the world of financial services must be asked and considerately answered. Unanimity of opinion among Industry participants and observers as to the future of Islamic Finance is unlikely. Whatever the outcome, the path to sustainable growth must begin with operational excellence, which is the key to unlocking lasting value in Islamic Finance. III. Local Law Obstacles To Structuring An Islamic Financing In The U.A.E. and Saudi Arabia* Although the United Arab Emirates (U.A.E.) is a civil code jurisdiction, Islamic Shari’ah is embedded in many provisions of law. Article 7 of the U.A.E. Constitution provides that Islamic Shari’ah is “a source” for legislation.35 Article 2 of the Civil Code36 provides that the principles of fiqh are to be utilized in understanding the underpinnings of the provisions of the Civil Code. Article 27 of the Civil Code provides that the provisions of a governing law cannot be applied if they contravene Islamic Shari’ah, public order, or the morals of the U.A.E.37 However, the reality is that similar to jurisdictions in the region other than Saudi Arabia,38 interest provisions are enforceable in the U.A.E. The Federal Supreme Court and the Dubai Court of Cassation have upheld Article 76 of the Commer34. See Shamil Bank, [2004] EWCA (Civ) 19, at [2]. * Contribution by Nabil A. Issa. 35. UNITED ARAB EMIRATES CONST., as amended 1996, art. 7. 36. Law No. 5 of 1985 CIV. CODE, art. 2 (U.A.E.). 37. Id. art. 27. 38. Many financings in Saudi Arabia are conventional financings that use euphemisms such as “commission” or “profit rate” rather than the term “interest.” Interestingly, the more conservative Shari’ah Boards refuse references to the SAMA Banking Disputes Committee for fear that such tribunal will enforce interestbased provisions of a financing, even if the financing is mean to be Shari’ah-compliant. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ISLAMIC FINANCE 281 cial Code39 enforcing interest provisions in financing agreements. In Saudi Arabia, the Basic Law provides that the Shari’ah is the law of the country.40 However, in both the U.A.E. and Saudi Arabia, many issues under local law do not make an exception for Shari’ah-compliant financings, making it more difficult to structure such financings than in jurisdictions around the world that do create such exceptions. A. RAHN Under Shari’ah, a security interest may be perfected only through possession.41 Lenders normally wish to obtain a rahn (mortgage or pledge) of the real estate, movable property of the project company, and the facility to be constructed for use by the project company. 1. Real Estate/Immovables Saudi Arabia, unlike the U.A.E., does not have a central registry to record real estate title deeds. To create a valid mortgage interest in real property in Saudi Arabia, the lender or other security holder and the owner must enter into a separate pledge agreement, the full text of which is then recorded on the title deed to the real property by the Notary Public. Afterward, the title deed is given to the mortgagee. 2. Movables In non-recourse financings, the financiers normally wish to take a mortgage over all the movables that belong to the borrower. In Saudi Arabia, the Commercial Mortgage Regulations42 establish a statutory framework applicable to mortgages over movable property. However, the governmental bodies tasked with recording the rahn on the title historically did not yet have a mechanism to do so. In December 2010, however, Saudi Arabia created the Unified Center for Lien Registration. Lenders are closely now watching to see how effectively they can enforce security registered with such center. The U.A.E., on the other hand, has historically provided for registration over movables with registrations such as over vehicles. 3. After-Acquired Property In general, under Shari’ah, marhoun (assets) must be something that can be validly sold. Therefore, any marhoun subject to a rahn “must (i) be in existence at the time of the execution of the . . . rahn, (ii) have a quantifiable value, and (iii) be saleable and deliverable.”43 Thus, in many Gulf Cooperation Council (GCC) jurisdictions it can be argued 39. Law No. 18 of 1993 COMM. CODE, art. 76 (U.A.E.). 40. Royal Decree No. A/90 27/08/1412 H (Mar. 1, 1992) (Saudi Arabia) [hereinafter Basic Law]. 41. See, e.g., Michael J.T. McMillen, Islamic Shari’ah-Compliant Project Finance: Collateral Security and Financing Structure Case Studies, 24 FORDHAM INT’L L. J. 1184, 1205 (2001). 42. Royal Decree No. M/75 dated 21/11/1424 H. (Feb. 27, 2004), supplemented by Decision No. 6320 dated 18/6/1425 H., published in Umm Al Qura edition no. 4016 (Oct. 29, 2004) (Saudi Arabia) (consisting of implementing regulations issued by the Minister of Commerce and Industry). 43. McMillen, supra note 41, at 1220. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 282 THE INTERNATIONAL LAWYER that after-acquired property is not part of the marhoun, unless schedules listing the marhoun are updated. A form of security agreement for the region utilizes the rahn-adl structure, in which the adl is akin to the Western concept of a trustee over the assets. This is supported by a “Deed of Possession” in which the schedules to the concerned security agreement are duplicated (and, as with the Security Agreement, updated regularly), thus creating a form of “constructive possession” of the assets and subjecting them to a rahn. Each type of asset in a financing must be analyzed to determine the best method under local law to subject such asset(s) to a rahn. While the rahn-adl concept has not been tested before local courts, to our knowledge, such structure has been utilized in non-recourse financings in the region. 4. Pledge of Interests in LLCs To be valid, any security interest . . . must be reduced to actual or constructive possession of the subject of the pledge given. In the absence of a share certificate that can be physically delivered to the lenders or even annotated, the pledge of interests in a Saudi LLC most Emirati LLCs is not enforceable under local law. We note, however, the Emirate of Dubai instituted a procedure to register a pledge of interests of LLCs incorporated in Dubai in December 2010. To get around this, lenders will often require sponsors to form special purpose vehicles (SPVs) in offshore jurisdictions (e.g., the Cayman Islands or elsewhere, including over shares of Jebel Ali Free Zone Offshore Companies or entities registered in the Dubai International Financial Center) to serve as the actual shareholders in the local project company, as the shares of such SPVs may be more readily pledged to the lenders as additional security for their loans.44 The lenders can then take security over the second-tier shares, which are the shares of the offshore companies established by the sponsors to hold their shares in the project company. This, however, does not always work if the company wishes to be deemed a GCC shareholder. At times, it may be possible to form the SPV in a jurisdiction such as the Dubai International Financial Centre (DIFC) or as a Jebel Ali Free Zone Offshore Company (JAFZOC) to be 100% GCC owned and still be deemed a GCC entity and pledge shares at the DIFC level or JAFZOC level. B. ASSIGNMENT OF CONTRACT PROCEEDS It is possible to assign contract proceeds and other intangible rights under Shari’ah, subject to the caveat that it is not possible to “perfect” such assignments through recordation with a central registry. Instead, borrowers in Saudi Arabia and the U.A.E. are often asked to assign specific contract proceeds, with an acknowledgment from the payer that the assignment will remain in effect until the assignee consents to any transfer or termination of the assignment. 44. Nabil A. Issa & Patrick F. Campos, Challenges in Structuring Non-Recourse Islamic Financing for Energy Projects in Saudi Arabia, 2 TEX. J. OIL GAS & ENERGY 395, 461-62 (2007). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ISLAMIC FINANCE 283 Under Shari’ah precepts as applied in Saudi Arabia and the U.A.E., however, unilateral assignments are not effective. To create an effective assignment of a contract of the relevant project company or contractual obligations of counterparties to a contract, the counterparties must be given notice of the assignment and must consent to the assignment. Thus, an assignment of amounts owed to a project company to the lenders must include a written consent of such assignment by the payer(s) in order to be a perfected interest. C. POWER OF ATTORNEY Financiers in Saudi Arabia and the U.A.E. often rely on a wakala, or a power of attorney given to a designee of the lenders to exercise certain “step-in rights” if there is a default. But powers of attorney are revocable, even if the power of attorney is characterized in the security documents as an “irrevocable” power of attorney. To protect against the revocation of a power of attorney granting step-in rights, lenders often include a liquidated damages provision in the security agreement that is triggered upon premature revocation. Local courts have enforced liquidated damages where they approximate the actual damages and are not drafted as excessive financial penalties for non-performance. It would further encourage Islamic financings if local laws allowed for irrevocable powers of attorney when attendant to a Shari’ah-compliant financing. D. SUKUK Both the U.A.E. and Saudi Arabia do not permit local limited liability companies, the most common form of corporate vehicle, to issue sukuks because such are considered “debt” instruments. This contradicts the intended nature of sukuk as an undividable interest in the underlying assets and results in the need for sukuk often to be issued by an offshore company. Such leads to most sukuk being “asset-based,” not “asset-backed.” E. TRANSFER OF LAND Because no exception is made for ijara financings to the fees charged to transfer land, most ijara financings in the U.A.E. are situations in which the financing party owns the land contractually but not legally. The financing party then gets a mortgage over the land. This arrangement is technically absurd as the “owner” of the land for Shari’ah purposes is getting a mortgage over such land. One would expect the Land Department in the relevant Emirate to waive such fees to encourage the use of ijaras. In Saudi Arabia, a financial institution may not own land unless it is being used for its premises or as part of a foreclosure. Because there is currently no mortgage law in Saudi Arabia, a party other than the financial institution holds title in its name for the benefit of the financial institution. One would also expect an exception to be made in Saudi Arabia for financial institutions to be the owner of record if that financial institution is using some form of Islamic financing such as an ijara. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 284 F. THE INTERNATIONAL LAWYER DISPUTE RESOLUTION 1. Issues in Relation to Governmental or Quasi-Governmental Entity It does not appear that, under Dubai law, a Dubai governmental entity would have the authority to give a prospective, blanket waiver of sovereign immunity in a contract or otherwise without the express prior consent of the Ruler of Dubai. In Saudi Arabia, Article 3 of the Arbitration Regulations states that governmental departments may not resort to arbitration to settle their disputes with third parties except after approval of the President of the Council of Ministers.45 In addition, Council of Ministers Resolution No. 58 dated 17/01/1383 H. provides that governmental departments may not agree to a foreign arbitration clause in their contracts.46 Finally, as in the case with foreign arbitration, a Saudi governmental department may not agree to a contract that provides for governing law other than the laws and regulations of Saudi Arabia.47 2. Enforcement of a Foreign Arbitral Award or Judgment Against the Project Company Almost any matter involving a U.A.E. national or a foreigner resident in the U.A.E. gives the local courts jurisdiction. It is not clear to what extent such arbitral awards are enforceable without having to re-litigate the merits of the matter in a local court. In order to enforce a judgment of a court in a foreign jurisdiction in Saudi Arabia, such judgment must be submitted to the Board of Grievances, which would have the discretion to enforce all of such judgment or such part thereof to the extent it is not inconsistent with Saudi Arabia’s laws or regulations.48 While both the U.A.E. and Saudi Arabia are signatories to the New York Convention for the Enforcement of Foreign Arbitral Awards, it is still not clear to what extent such arbitral awards can be easily enforced.49 Both jurisdictions, however, have enforced arbitral awards and judgments rendered in other GCC jurisdictions. 3. Use of the SAMA Banking Disputes Committee The Saudi Arabian Monetary Agency (SAMA) Banking Disputes Committee has played a critical role in providing a tribunal that understands financing documents and more quickly resolves banking disputes involving Saudi Arabian parties than the Saudi Board of Grievances. Because the Committee regularly enforces the interest portions of conventional financings in Saudi Arabia, the more conservative Shari’ah Boards, fearing that the 45. Royal Decree No. M/46 12/07/1403 (Apr. 24, 1983) (Saudi Arabia) [hereinafter Arbitration Regulations]. 46. See Issa & Campos, supra note 44, at 466. 47. Id. at 466-67 (citing Art. 3 of Council of Ministers’ Resolution No. 58 17/01/1383 H. (June 25, 1963) (Saudi Arabia)). 48. Id. at 467. 49. See Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3; see also, e.g., Dale E. Stephenson & Khulaif Al-Enezee, Enforcement of Foreign Arbitral Awards in Saudi Arabia, FINANCIER WORLDWIDE, Dec. 2010, at 56 (discussing the challenges to enforcement in Saudi Arabia). We also note that it is believed that courts of the Emirate of Dubai have recently begun to enforce arbitral awards rendered in jurisdictions subject to the New York Convention. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ISLAMIC FINANCE 285 provisions may enforce interest provisions in a financing document even if it portends to be Shari’ah-compliant, refuse provisions in Shari’ah-compliant financing documents that give the Committee jurisdiction over a dispute. The Saudi Arabian authorities should address this concern by deciding that the Islamic financing industry has grown enough to eliminate the need for conventional financing in Saudi Arabia and that the Committee should not enforce interest provisions in Shari’ah-compliant financings. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW Aerospace and Defense Industries EDITED BY: AUTHORED MYERS, ADAM R. PEARLMAN, MARK J. NACKMAN, BY: AND AND HARTMANN YOUNG MARK J. NACKMAN, MEREDITH A. RATHBONE, CHRISTOPHER A. WILLIAM M. PANNIER* I. Federal Awardee Performance and Integrity Information System (FAPIIS) A. BACKGROUND On March 23, 2010, the Federal Acquisition Regulatory Council issued a final rule amending the Federal Acquisition Regulation (FAR) and implementing the Federal Awardee Performance and Integrity Information System (FAPIIS), now set forth in FAR 9.104-6.1 Two new FAR Clauses were also added: • FAR 52.209-7, Information Regarding Responsibility Matters, which applies when the resultant contract value is expected to exceed $500,000;2 and • FAR 52.209-8, Updates of Information Regarding Responsibility Matters, which applies when the resultant contract value is expected to exceed $500,000 and the contractor has current active Federal contracts and grants with a total value over $10,000,000.3 On September 29, 2010, another final rule amending the FAR established procedures for contracting officers (COs) submitting contractor information into the Past Performance Information Retrieval System (PPIRS) and the FAPIIS module in PPIRS.4 PPIRS is * Hartmann Young of Perkins Coie LLP, Mark J. Nackman of General Dynamics Advanced Information Systems, and Adam R. Pearlman of the U.S. Department of Defense were editors of the Aerospace and Defense Industries Committee’s Year in Review for 2010. William M. Pannier authored Section I on the Federal Awardee Performance and Integrity Information System. Meredith A. Rathbone of Steptoe & Johnson LLP authored Section II on Defense Trade Treaties. Mark J. Nackman authored Section III on the Export Controls Compliance Rule. Christopher A. Myers and William M. Pannier of Holland & Knight authored Section IV on the U.K. Bribery Act of 2010. The views of each author are not attributable to their law firms, companies, or government agencies. 1. Federal Awardee Performance and Integrity Information Systems, 75 Fed. Reg. 14,059 (Mar. 23, 2010) (to be codified at 48 C.F.R. pts. 2, 9, 12, 42, & 52). 2. Solicitation Provisions and Contract Clauses, 48 C.F.R. § 9.104-7(b) (2011). 3. Id. § 9.104-7(c)(1)-(2). 4. Termination for Default Reporting, 75 Fed. Reg. 60,258 (Sept. 29, 2011) (to be codified at 48 C.F.R. pts 8, 12, 15, 42, & 49). 287 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 288 THE INTERNATIONAL LAWYER an internet-based repository of information concerning past performance under federal contracts. B. INFORMATION REPORTING AND DECISION-MAKING FAPIIS is intended to collect information from systems including PPIRS and the Excluded Parties List System (EPLS) in order to provide up-to-date information about a contractor’s quality of performance and his business ethics. The EPLS identifies contractors that have been debarred and may not be awarded prime contracts or become subcontractors under a federal contract. Thus, the focus of FAPIIS is on contractor responsibility, including: • Criminal, civil, or administrative proceedings in connection with the award or performance of a government contract; • Terminations for default or cause; • Determinations of non-responsibility; or • Comparable information relating to a grant.5 By submitting a proposal on a federal contract over $500,000, an offeror with over $10 million in active contracts and grants represents that the information it has entered in FAPIIS is current, accurate, and complete regarding to criminal, civil, and administrative proceedings in which a determination of fault was made.6 Before a contract above the simplified acquisition threshold may be awarded, the CO must consider all of the information in FAPIIS.7 When there is relevant adverse information in FAPIIS about a contractor that is not debarred or suspended, the CO must–before making a responsibility determination–promptly ask the contractor to provide additional information showing that it is responsible.8 The CO is afforded discretion in making a responsibility determination;9 however, the CO must document the contract file to demonstrate how information in FAPIIS was used in the determination.10 If the requisite conditions are met, a CO’s determination of non-responsibility may be entered into FAPIIS.11 A subsequent change in information must be reported in FAPIIS, such as a termination for default being converted to a termination for convenience, or a court or Board of Contract Appeals entering a judgment. Notably, FAPIIS will automatically notify a contractor when the government posts new information about it.12 Further, a contractor can enter comments in FAPIIS (such as in response to a non-responsibility determination or information entered by the government), and those comments will be retained as long as the associated information is retained.13 5. Federal Awardee Performance and Integrity Information Systems, 48 C.F.R. § 9.104-6(c) (2011). 6. Information Regarding Responsibility Matters, 48 C.F.R. § 52.209-7 (2011). 7. 48 C.F.R. § 9.104-6(a). 8. Id. § 9.104-6(c)(1). 9. Id. § 9.104-6(b). 10. Id. § 9.104-6(d). 11. Determinations and Documentation, 48 C.F.R. § 9.105-2(b) (2011). 12. Updates of Information Regarding Responsibility Matters, 48 C.F.R. § 52.209-9(b)(2) (2010), repealed by Small Entity Compliance Guide, 76 Fed. Reg. 4191-01 (Jan. 24, 2011). 13. 48 C.F.R. § 52.209-9(b)(2). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW AEROSPACE AND DEFENSE INDUSTRIES 289 Finally, pursuant to the 2010 Supplemental Appropriations Act,14 all information in FAPIIS (except for contractor performance reviews) will be publicly available. II. Defense Trade Treaties with the United Kingdom and Australia On September 29, 2010, the U.S. Senate ratified two bilateral defense trade treaties with the United Kingdom and Australia. The treaties,15 signed in 2007 by former President George W. Bush, will eliminate licensing requirements for certain exports of defense articles from the United States to the United Kingdom and Australia. Similarly, no license will be required under U.K. and Australian law for certain exports of defense articles to the United States. Only transactions involving certain yet-to-be-identified projects and members of “Approved Communities” in those countries can take advantage of the changes implemented under the treaties. Although the treaties will not affect most defense trade between the United States, the United Kingdom, and Australia, these treaties may provide significant relief to exporters who have eligible transactions. Implementing arrangements accompany both treaties and provide more detail. A new statute, The Security Cooperation Act of 2010,16 implements the treaties into U.S. law. The statute makes conforming amendments to the Arms Export Control Act (AECA),17 the primary statute controlling the export of U.S. defense articles and services. Similarly, the International Traffic in Arms Regulations,18 promulgated under the authority of the AECA, will be amended to reflect the new treaties. To be eligible for export from the United States without a license, the items to be exported must be for use in specific projects to be determined by the United States, the United Kingdom, and Australian governments.19 The U.S. Department of Defense (DoD), the U.K. Ministry of Defence (MoD), and the Australian Department of Defence will publish the lists of projects. For projects in which the U.S. Government is the end user, license-free exports of certain eligible defense articles are permitted, provided that the U.S. Government issues a solicitation or contract stating that parties authorized for eligibility under the treaties may participate.20 It is not anticipated that all projects in which the U.K. and Australian governments are end users will be able to receive exports from the United States license-free, and it is expected that further inter-governmental conversations will determine the specific criteria that will be used to identify the projects for which license-free shipments may be made. In addition to projects for end use by the United States, United Kingdom, and Australian governments, exporters may be able to 14. Supplemental Appropriations Act, Pub. L. No. 111-212, 124 Stat. 2340 (2010). 15. Treaty with Australia Concerning Defense Trade Cooperation, U.S.-Austl., Sept. 5, 2007, S. TREATY DOC. NO. 1110-10 [hereinafter Australia Treaty]; Treaty With United Kingdom Concerning Defense Trade Cooperation, U.S.-U.K., June 21, 2007, S. TREATY DOC. NO. 110-7, [hereinafter U.K. Treaty]. 16. Supplemental Appropriations Act § 111-212. 17. Arms Export Control Act, 22 U.S.C. § 2778 (2011). 18. International Traffic in Arms Regulations, 22 C.F.R. § 120.1-.32 (2011). 19. Australia Treaty, supra note 15, § 3(1)(c); U.K. Treaty, supra note 15, § 3(1)(c). 20. Implementing Arrangement Pursuant to the Treaty Between the Government of the U.S. and the Government of the U.K. Concerning Defense Trade Cooperation, U.S.-U.K., § 3(1), Feb. 14, 2008, http://www. pmddtc.state.gov/treaties/documents/UK_Implementing.pdf [hereinafter U.K. Implementing Arrangement]. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 290 THE INTERNATIONAL LAWYER take advantage of license-free shipments to certain combined military and counterterrorism operations and cooperative security and defense programs.21 In addition to the requirement that an export must be made relating to an approved project, the treaties also require that the exporter and recipient must be part of an “Approved Community” of government and private entities eligible to export and/or receive defense articles license free. In the United States, the Approved Community will consist of U.S. Government entities and other entities registered with the U.S. State Department’s Directorate of Defense Trade Controls as manufacturers or exporters of defense articles.22 The U.K. Approved Community members will consist of the U.K. MoD and other U.K. Government agencies to be specified, as well as non-government entities that receive approval from the U.K. MoD for receipt of defense articles under the treaty.23 The U.K. and U.S. governments will review and approve applications of U.K. non-governmental entities to join the approved community.24 A variety of factors will be considered in determining an entity’s eligibility for becoming a member of the Approved Community, including, inter alia, whether the entity is under foreign ownership or control, U.S. export licensing history with the entity, and the entity’s prior compliance with U.S. and U.K. export control laws.25 A similar process will be followed to determine Australian Approved Community members.26 Only certain types of defense articles will be eligible for license-free export under the treaties, and so-called “dual use” items controlled under the U.S. Commerce Control List or the EU Dual Use Regulation are outside the scope of the treaty.27 A list of ineligible defense articles is found in the respective implementing arrangements to both treaties, including, among others: classified defense articles (except in certain circumstances), defense articles not controlled on the U.K. or Australian munitions lists, articles in the annexes to the Missile Technology Control Regimes (such as rockets and unmanned aerial vehicle systems, nuclear and directed energy weapon technologies), and several others.28 All items that are excluded from license-free export under the treaties will continue to require export licenses unless other ITAR exceptions apply. Under the Australian treaty, all personnel eligible to receive defense articles, whether civilian or government employees, are required to be cleared at the “Restricted” level or 21. Australia Treaty, supra note 15, § 3(1)(a-b); U.K. Treaty, supra note 15, § 3(1)(a)-(b). 22. U.K. Treaty, supra note 15, § 5. 23. Id. § 4(1)(a), (d). 24. U.K. Implementing Arrangement, supra note 20, § 7(3), (6). 25. Id. § 7(4). 26. Implementing Arrangement Pursuant to the Treaty Between the Government of the U.S. and the Government of Australia Concerning Defense Trade Cooperation, U.S.-Austl., § 6(4), Mar. 14, 2008, http:// www.pmddtc.state.gov/treaties/documents/Australia_Implementing.pdf [hereinafter Australia Implementing Arrangement]. 27. Australia Treaty, supra note 15, § 3(2); Treaty with Australia Concerning Defense Trade Cooperation: List of Defense Articles Exempted from Treaty Coverage, U.S.-Austl., pt. B, item 16, Sept. 5, 2007, http:// www.pmddtc.state.gov/treaties/documents/Australia_Definitions.pdf [hereinafter Australia Exempt List]; U.K. Treaty, supra note 15, § 3(2); Treaty with U.K. Concerning Defense Trade Cooperation: List of Defense Articles Exempted from Treaty Coverage, U.S.-U.K., pt. B, item 16, June 21, 2007, S. TREATY DOC. NO. 110-7, available at http://www.pmddtc.state.gov/treaties/documents/UK_Exempt.pdf [hereinafter U.K. Exempt List]. 28. U.K. Exempt List, supra note 27; Australia Exempt List, supra note 27. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW AEROSPACE AND DEFENSE INDUSTRIES 291 higher29 and must be physically located within Australia.30 Background checks are also required to determine whether the personnel have “significant ties” to third countries.31 If ties are found to exist with countries proscribed under ITAR section 126.1, further screening is required before eligibility can be approved.32 The U.K. implementing arrangement permits only U.K. military personnel and persons with a “need to know” or “Security Check” level clearance to access defense articles exported pursuant to the treaty.33 In addition to the United States permitting unlicensed exports of defense articles to the United Kingdom and Australia, both governments will, under certain conditions, allow members of their Approved Communities to export defense articles to U.S. Approved Community members without obtaining a specific license. A U.K. Open General Export License (OGEL) was issued on October 6, 2010, authorizing the export of certain defense articles to the United States and several other destinations.34 The OGEL covers most, but not all, of the defense articles that would be permitted under the defense trade treaty with the United States. It is expected that this OGEL will be supplemented by additional OGELs in the future. Australia is also expected to issue approvals to permit license-free trade of certain defense articles. The implementing arrangement between the United States and Australia specifies several requirements that Australia will impose on such exports, such as marking, recordkeeping, and tracking requirements.35 The countries have also agreed to cooperate in the enforcement of their export control laws, including by sharing information during investigations, assisting in prosecutions, and conducting end use and end user inspections.36 III. Final Rule on Export Control Compliance On April 8, 2010, the DoD issued a final rule regarding compliance with U.S. export control laws and regulations in connection with defense acquisitions.37 The rule focuses on regulations issued by the Department of State and the Department of Commerce.38 It 29. Australia Implementing Arrangement, supra note 26, § 6(11)(a). 30. Id. § 6(11). 31. Id. § 6(11)(b). 32. Australia Implementing Arrangement, supra note 26, § 6(11)(b), (12). 33. U.K. Implementing Arrangement, supra note 20, § 7(11). 34. Export License, Open General Export License, Military Goods, U.S.-U.K., Oct. 6, 2010, http://www. bis.gov.uk/assets/biscore/eco/ogels-current/10-1191-ogel-military-goods.pdf. 35. Australia Treaty, supra note 15, § 12; Australia Implementing Arrangement, supra note 26, § 10. 36. Australia Implementing Agreement, supra note 26, § 11(12). 37. Defense Federal Acquisition Regulation Support; Export-Controlled Items, 75 Fed. Reg. 18,030 (Apr. 8, 2010) (to be codified at 48 C.F.R. pts. 204, 235, 252) [hereinafter Export-Controlled Items 18,030]. 38. Defense Items, Including Those on the U.S. Munitions List or Those For Other Military Use, Are Regulated Under the Export Control Regime Set Forth in the International Traffic in Arms Regulation (ITAR), 22 C.F.R. §§ 120–130 (2010), as established by the Arms Export Control Act, 22 U.S.C. § 2778 (2010) and administered by the U.S. Department of State. Commercial Items That Have Potential “Dual Use” As Defense Items, Are Regulated Under the Export Administration Regulation (EAR), 15 C.F.R. §§ 730-74 (2010), as administered by the U.S. Department of Commerce. The EAR, however, was originally created pursuant to the now-expired Export Administration Act, 50 U.S.C. §§ 2401-20 (1979) (amended 2000). The EAR was subsequently extended by Exec. Order No. 13222, 66 Fed. Reg. 44,025 (2001), pursuant to the authority granted to the President under the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701-07 (2008). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 292 THE INTERNATIONAL LAWYER does not address any export controls imposed by the Department of Energy, Nuclear Regulatory Commission, or Department of the Treasury.39 The final rule satisfies statutory requirements directing the DoD to promulgate regulations requiring DoD contractors to comply with U.S. export control laws and regulations.40 As a result of the DoD amending the Defense Federal Acquisition Regulation Supplement (DFARS), aerospace and defense contractors have begun to see a new clause dealing with U.S. export controls in their DoD prime and subcontracts.41 The final rule is a significant change in two ways from the interim rule issued on July 21, 2008.42 First, in response to comments indicating a need to simplify the interim rule, there is now a single DFARS clause43 as opposed to the two-tier structure under the interim rule.44 Second, the new single DFARS clause is to be included in all DoD contracts45 and is a mandatory flow-down to all subcontracts.46 The new DFARS clause acknowledges that contractors were already required to comply with U.S. export control laws and regulations, regardless of the presence of the clause in their contracts and subcontracts.47 The new clause essentially creates a contractual obligation to follow the law.48 The DoD issued the new DFARS clause as a way to increase compliance with U.S. export control laws and regulations.49 Thus, at first blush the new DFARS clause does not seem noteworthy. But because the new DFARS clause creates a contractual obligation, a contractor’s ITAR and EAR violations are now simultaneously failures to comply with contract terms and conditions, so that a contractor in violation is potentially also subject to termination for default.50 In addition, because the new DFARS clause simply says, “The Contractor shall comply with all applicable laws and regulations regarding export-controlled items”51 and does not limit compliance to subject matter within the scope of the contract, it is conceivable that a contracting officer could terminate a contract for default based on a contractor’s export control violation completely unrelated to the subject matter of the underlying contract. Finally, the new DFARS clause also opens the door to export control violations being raised as potential False Claims Act allegations, particularly by a qui tam relator. 39. See 75 Fed. Reg. 18,030. 40. National Defense Authorization Act for Fiscal Year 2008, Pub. L. No. 110-181, § 890(a), 122 Stat. 3, 269 (2008). 41. See Export-Controlled Items, 48 C.F.R. § 252.204-7008 (2010). 42. Defense Federal Acquisition Regulation Support; Export-Controlled Items, 73 Fed. Reg. 42,274 (July 21, 2008) (codified at 48 C.F.R. pts. 204, 235, 252). 43. 48 C.F.R. § 252.204-7008. 44. See, e.g., 75 Fed. Reg. 18,030; Contract Clauses, 48 C.F.R. § 204.7304 (2010). 45. 75 Fed. Reg. 18,030. 46. 48 C.F.R. § 252.204-7008(e). 47. Id. § 252.204-7008(c). 48. See, e.g., id. § 204.7303(b). 49. 75 Fed. Reg. 18,030. 50. See, e.g., Contract Terms & Conditions—Commercial Items, 48 C.F.R. § 52.212-4(m) (2010), Default (Fixed-Price Supply & Service), 48 C.F.R. 52.249-8(a)(1)(iii) (2010), Default (Fixed-Price Research & Development) 48 C.F.R. 52.249-9(a)(1)(iii) (2010). 51. 48 C.F.R. § 252.204-7008(b). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW AEROSPACE AND DEFENSE INDUSTRIES 293 IV. The U.K. Bribery Act 2010 One major legal issue for those involved in aerospace and defense has been anti-bribery laws. The U.K.’s new anti-bribery law, the Bribery Act 2010 (Act), received royal assent on April 8, 2010 and is scheduled to take effect in April 2011.52 The Act strives to enhance global competition, especially in high-value transactions and large-scale public procurements, by deterring and punishing bribery and creating an expectation that bribes will not be offered—at least by those with connections to the United Kingdom. The Act is the U.K. counterpart to the U.S. Foreign Corrupt Practices Act (FCPA), but its provisions go beyond those in the FCPA. In a nutshell, the Act addresses both sides of a bribery transaction by making it an offense either to provide a bribe or to receive one. A. STATUTORY ELEMENTS 1. Bribing Another Party Providing a bribe occurs when, either directly or through a third party, one offers, promises, or gives a financial or other advantage to induce or reward improper performance (i.e., active bribery).53 Thus, the bribery transaction does not have to be completed to constitute an offense. The mere offer is enough. Furthermore, in contrast to the FCPA, the Act criminalizes private-sector bribery in addition to the bribery of public officials, with the latter being addressed specifically in its own section below. 2. Being Bribed Receiving a bribe occurs when one requests, agrees to receive, or accepts a financial or other advantage to induce or reward improper performance (i.e., passive bribery).54 3. Expectation Test The test for determining whether there was improper performance of a bribe is based on what a reasonable person in the U.K. would expect proper performance to be, regardless of where in the world the offense actually occurred. What is required or permitted by applicable local written law may be considered in the analysis, though local custom or practice must be disregarded.55 4. Bribery of Foreign Public Officials It is a separate offense under the Act to provide a bribe to a foreign public official, such as one holding a legislative, administrative, or judicial position, in order to influence that person in his or her official capacity.56 52. 53. 54. 55. 56. Bribery Act, 2010, c. 23 (U.K.). Bribery Act, 2010, c. 23, § 1 (U.K.). Id. § 2. Id. § 5. Id. § 6. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 294 THE INTERNATIONAL LAWYER 5. Failure to Prevent Bribery The Act requires a commercial organization, which may take the form of a partnership or a body corporate (either being referred to hereinafter as a “company”), to prevent anyone associated with it from providing a bribe. The association between a company and the person providing a bribe is broadly construed to include employees, agents, and subsidiaries, at a minimum.57 Nevertheless, it is an affirmative defense for a company to prove that it had in place “adequate procedures” designed to prevent bribery.58 Whether a company’s policies and procedures are adequate to prevent bribery is a determination that must be made on a case-by-case basis. Accordingly, policies and procedures must be carefully drafted, effectively implemented, and attentively followed. 6. Penalties A company convicted under the Act is subject to an unlimited fine, and a convicted individual is subject to an unlimited fee and imprisonment for up to ten years.59 B. SIGNIFICANT ISSUES 1. Extra-Territorial Application and Jurisdiction Under the Act, U.K. courts will have jurisdiction over any offense committed in the United Kingdom and any offense committed outside the United Kingdom by a British national or resident, U.K. corporation, or Scottish partnership. Additionally, if a company carries out its business in whole or in part in the United Kingdom, then U.K. courts will have jurisdiction no matter where the offense was committed.60 2. Hospitality and Business Promotions The reasonable provision of hospitality or a business courtesy of nominal value is unlikely to constitute an offense under the Act; however, care must be taken because hospitality and promotional items and activities could potentially be used to induce or reward improper performance. 3. Facilitation Payments Because the Act does not exempt facilitation payments, small “grease payments” made to facilitate routine government action may represent a bribery offense. The Act thus differs from the FCPA, which contains an express exception for payments made to facilitate routine government action. 57. 58. 59. 60. Id. Id. Id. Id. § 7. § 13. § 11. § 12. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW AEROSPACE AND DEFENSE INDUSTRIES 295 4. Prosecutorial Discretion The decision to pursue a suspected bribery offense is within the discretion of the prosecuting authorities. Key considerations will include the sufficiency of the evidence and whether prosecution is in the public interest.61 At best, this portion of the Act affords flexibility in equitable and just application of the Act, and at worst, the possibility of disparate enforcement. C. THE “ADEQUATE PROCEDURES” DEFENSE: SIX PRINCIPLES FOR BRIBERY PREVENTION On September 14, 2010, the Ministry of Justice published draft guidance (Guidance) concerning how a company should prepare and implement appropriate bribery prevention policies and procedures.62 Recognizing that such policies and procedures will vary widely, the Guidance sets out six general principles applicable to businesses of all types and sizes and in all market sectors. The six principles are similar to the guidance on effective compliance and ethics programs promulgated by the U.S. Sentencing Commission. 1. Risk Assessment A company should comprehensively assess its exposure to bribery risk on a regular basis. These risks may differ from one company to another for various reasons, such as size or industry, for example, and evolve over time. After performing a risk assessment, a company should understand the nature and extent of the bribery risks facing its market sector, including transaction risk, country risk, and business relationship risk exposure, such as through a joint venture, subsidiary, or third-party relationship. Based on the risk assessment results, a company should tailor its bribery prevention efforts accordingly. 2. Top-Level Commitment A top-level commitment to prevent bribery in all aspects of business operations should be communicated internally and externally, as appropriate, and it should be effectuated through a company code of conduct and bribery prevention policies. Moreover, every level of the organization from the top down should share a commitment to a culture of integrity and zero tolerance for bribery. 3. Due Diligence Before establishing a relationship with an individual or business enterprise, a company must perform its due diligence. For example, a company should gather and evaluate available information about parties with whom it plans to do business. It should take steps to ensure transparency and ethical standards in its related business dealings, such as by delineating policies and procedures to ensure compliance with the Act, and having standards in place concerning why, when, and to whom funds may be released. 61. Consultation on Guidance About Commercial Organizations Preventing Bribery (Section 9 of the Bribery Act 2010), MINISTRY OF JUSTICE (U.K.), (2010). 62. Id. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 296 THE INTERNATIONAL LAWYER 4. Clear, Practical, and Accessible Policies and Procedures After completing its risk assessment and due diligence, a company will be in a better position to draft effective bribery prevention policies and procedures. Such policies and procedures should be clear, practical, enforceable, and accessible internally and externally, as appropriate. Topics worthy of attention may include political and charitable contributions, gifts, hospitality and promotional efforts, advice on relevant laws and regulations, reporting requirements and non-retaliation policy, and guidance for responding to a demand for a bribe or facilitation payment or when an incident of bribery is reported or alleged. 5. Effective Implementation A company’s bribery prevention policies and procedures must be implemented effectively–a “paper program” will not suffice. Therefore, a suitable person must be responsible for such implementation. Policies and procedures, including in regard to reporting mechanisms, must be appropriately communicated internally and externally. Training programs must be prepared and accomplished. Monitoring and auditing controls must be established, and policies and procedures must be reviewed, evaluated, and revised, as required. 6. Monitoring and Review Finally, a company must ensure that its policies and procedures are being followed, that issues are being identified and addressed as they arise, and that improvements are made accordingly. D. CONCLUSION By enacting the Act, the United Kingdom joins the growing number of countries that have made serious commitments to combating bribery and related corruption in international business transactions. These commitments and the substantial resources being devoted to criminal and other enforcement efforts create substantial risks for companies operating in the international arena. The draft Guidance from the U.K. Ministry of Justice provides sensible principles for all companies exposed to the risks of international transactions. One concern that cannot be overlooked, though, is how U.K. prosecutors will treat voluntary disclosures made to U.S. authorities under the FCPA. The Act does not impose self-reporting obligations. Of course, it is possible that making a voluntary disclosure to and cooperating with U.K. authorities could help to avoid prosecution, or at least merit more favorable treatment. But it is conceivable that an FCPA disclosure could result in the United States and the United Kingdom separately prosecuting a company based on the same operative facts. Plainly, companies doing business in the international marketplace must heed the Act and be mindful of potentially increased exposure to prosecution and penalties. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Energy and Natural Resources Law RICARDO SILVA, MARCOS RÍOS, MIROLJUB MAĆES̆IĆ, LEONARDO SEMPÉRTEGUI, SEAN F. BURNS, RICHARD SILBERSTEIN, FULYA KAZBAY, OMER GOKHAN OZMEN, AND TOLGA CABAKLI* I. Angola Angola’s focus on energy during 2010 was characterized by continued interest in oil and gas exploration and production, by the first discussions on bio-fuels projects, and commencement of the works for implementation of the Sonangol Refinery Project (“Sonaref Project”) in Lobito, which is expected to produce 200,000 barrels per day (bpd) of fuels for internal consumption and export to regional markets.1 Several laws were passed throughout 2010 to allow for the implementation of the refinery and the bio-fuels projects, including three Presidential Decrees, covering issues related to the refinery site, one Presidential Legislative Decree with the Project legal framework, as well as a Biofuels Law. The country’s oil and labor authorities continued the work commenced in 2009 of revamping the rules applicable to the recruitment and training of Angolan nationals by companies engaged in the oil sector, by passing two Ministry of Petroleum Executive Decrees to regulate Decree-Law 17/09 of June 26, 2009, the so-called “Training Decree-Law.”2 Executive Decree 13/10 covers the recruitment, integration, training, and development of Angolan personnel, as well as the hiring of foreign personnel for carrying out petroleum operations in Angola. In turn, Executive Decree 14/10 further elaborates on the opera* Ricardo Silva is a Partner at Miranda Correia Amendoeira & Associados law firm in Portugal. He authored the sections on Angola, Brazil, Equatorial Guinea, Gabon, Mozambique, Portugal, São Tomé e Prı́ncipe, and Timor-Leste. Marcos Rı́os, a Partner at Carey y Cia. Ltda in Chile, authored the section on Chile. The section on Croatia was authored by Miroljub Macesic, Senior Partner at the Law Offices Macesic & Partners in Croatia. The section on Ecuador was authored by Leonardo Sempértegui, a Partner at Sempértegui Ontaneda LLP in Ecuador. Sean F. Burns is the Executive Director at Encompass Research Global in New Zealand; he authored the sections on Japan and New Zealand. The section on Spain was authored by Richard Silberstein, a Partner at Gómez-Acebo & Pombo Abogados, S.L.P. in Spain. Fulya Kazbay is a Senior Associate, and Gokhan Ozmen and Tolga Cabakli are Associates at Birsel Law Offices in Turkey; they co-authored the section on Turkey. The Committee’s 2009 Year-in-Review article is available at 44 INT’L LAW. 367 (2010). 1. See Country Analysis Briefs: Angola, ENERGY INFO. ADMIN. (Jan. 2010), http://www.eia.doe.gov/cabs/ Angola/pdf.pdf. 2. See Paul M. Kiernan et al., International Energy and Natural Resources, 44 INT’L LAW. 367, 367 (2010). 297 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 298 THE INTERNATIONAL LAWYER tion of the Fund to Train and Develop Angolan Human Resources in the Petroleum Sector as well as on some of the practical aspects of the so-called “training levy” payments. Finally, 2010 may be seen as the year of change in Angola’s petroleum sector with the world’s eyes turning to the country’s pre-salt potential. Two risk services agreements were entered into by the Angolan State to cover pre-salt exploration and production in Blocks 9 and 21 offshore Angola, and various international oil companies are said to be interested in testing Angola’s pre-salt potential, which is expected to be similar to Brazil’s. II. Brazil 2010 was a year of intense debate in Brazil over the future structure of its oil and gas regulatory framework, which was brought about by huge discoveries of oil reserves in the country’s pre-salt horizons. There is still uncertainty as to the model for the future legal and contractual regulation of exploration and production activities in Brazil, but it seems certain that there will be a shift to a production-sharing model. Separately, the National Oil, Gas, and Bio-fuels Agency (ANP) approved Resolution No. 10 of May 9, 2010, on new procedures for the use of ANP’s electronic system. Pursuant to such Resolution, a digital certificate issued by a certifying authority duly accredited by ICP-Brazil is now mandatory for authentication and a digital signature of documents and certain information must be submitted to the Agency, through its electronic system. In keeping with Brazil’s strong investment in bio-fuel production, the country’s Central Bank issued Resolution No. 3863, which established a credit line in the amount of R$2.4 billion (approximately US$1.37 billion) to finance the storage of ethanol fuel in Brazil.3 The credit line is supported by the National Bank for Economic and Social Development (BNDES). The beneficiaries of this credit line include, inter alia, plants, distilleries, production cooperatives, and trading companies. III. Chile The Ministry of Energy was created in December 2009. In its creation, the new ministry assumed and changed other government entities’ duties on energy matters, such as the authorities of the Ministry of Mining and the National Energy Committee (NEC).4 Further, an entire area of the new Ministry of Energy is now devoted to Renewable NonConventional Energies.5 Prior to the creation of the Ministry of Energy, a new Center for Renewable Energies6 was created in August 2009 by the Chilean Production Promotion Agency (Corporación de Fomento a la Producción—CORFO) and NEC, with the aim to promote and foster the 3. See Press Release, UNICA Sugarcane Indus. Ass’n, Ethanol Sales by Mills in South-Central Brazil Jump, Reaching 2.15 Billion Liters by the End of May (June 21, 2010), available at http://english.unica.com. br/noticias/show.asp?nwsCode=%7B58460910-6C29-48E6-8C34-DF0F9511ED70%7D. 4. Representation of the State of Chile and, in general, the Ministry of Mining’s authority in connection with special oil and gas exploration and exploitation contracts was transferred to the new Ministry of Energy. See Law No. 20402 arts. 5, 6, Transitional Provisions art. 7, Noviembre 25, 2009, DIARIO OFICIAL [D.O.] (Chile), available at http://www.leychile.cl/Navegar/?idNorma=1008692&idParte=0. 5. See id. art. 2(7). 6. See Sobre el CER: Quienes Somos, CENTRO DE ENERGIAS RENOVABLES, http://www.cer.gov.cl/sobre-elcer/quienes-somos/ (last visited Jan. 28, 2011). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ENERGY & NATURAL RESOURCES 299 development of unconventional renewable energy sources. Subsequently, on October 28, 2009, CORFO executed a resolution to create an Unconventional Renewable Energy Finance Committee and promulgated its regulations.7 The essential purposes of this Committee include the financing of projects associated with unconventional renewable energy sources and other related matters such as providing information, training, and performing promotional activities related to such energy sources. To that end, this Committee approves State financial assistance to and awards funds for: (i) electric power transmission lines to facilitate the access of energy sources to the grid; (ii) solar power plants; and (iii) deep exploration of geothermal energy resources.8 New Law No. 20,365, of August 19, 2009, established a special tax benefit for construction companies in the residential property market.9 Under this law, a construction company may deduct from its monthly provisional corporate tax payment the amount spent in solar energy systems used in residential properties, provided that such systems contribute at least thirty percent of the annual average hot water expenditure for the property. This law and its regulations set forth specific requirements for relevant solar energy systems to be eligible for this tax incentive, such as minimum parts, materials, size requirements, etc.10 The amount of applicable tax benefit will, among other elements, essentially depend on the value of the relevant solar energy system and the price of the property.11 On December 1, 2009, the NEC enacted technical regulations to implement Law No. 20,257,12 governing unconventional renewable energy sources.13 The regulations provide for the means to prove compliance with statutory annual minimums of energy injected to the power grid, produced through renewable energy sources.14 IV. Croatia The year 2010 saw a number of political and economic developments in the energy sector. The most significant developments in Croatia concern joining the Russian South Stream Pipeline Project, implementing new energy investment programmes such as the Government’s anti-recession measure, and construction of a temporary floating LNG terminal on the island of Krk. 7. Resolution No. 341, Octubre 28, 2009, DIARIO OFICIAL [D.O.] (Chile), available at http://www.ley chile.cl/Navegar?idNorma=1008539&buscar=resolucion+341+corfo. 8. Id. 9. Law No. 20365 art. 1, Augosto 11, 2009, DIARIO OFICIAL [D.O.] (Chile), available at http://www.ley chile.cl/Navegar?idNorma=1005169&buscar=ley+20365. 10. Decree No. 331 art. 1, Diciembre 31, 2009, DIARIO OFICIAL [D.O.] (Chile), available at http://www. leychile.cl/Navegar?idNorma=1013622&idVersion=2010-05-26. 11. See id. art. 6. 12. Law No. 20257, Noviembre 27, 2009, DIARIO OFICIAL [D.O.] (Chile), available at http://www.cne.cl/ cnewww/export/sites/default/08_Normativas/02_energias/descargable_renovables/2008_ResEx1278_ERNC. pdf. 13. Law No. 20257, Marzo 20, 2008, DIARIO OFICIAL [D.O.] (Chile), available at http://www.bcn.cl/leyes/ pdf/actualizado/270212.pdf. 14. See Decree with Force of Law No. 4/20018 art. 150 bis, Mayo 12, 2006, DIARIO OFICIAL [D.O.] (Chile), available at http://www.bcn.cl/leyes/pdf/actualizado/258171.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 300 THE INTERNATIONAL LAWYER On March 2, 2010, Croatia signed a cooperation agreement with the Russian Government on the construction and operation of the gas pipeline in Croatian territory.15 The South Stream project is a gas pipeline between the Russian company, Gazprom, and the Italian company, Eni, that should enable the transportation of Russian natural gas from the Bulgarian Black Sea coast to Central European countries, including Croatia. The agreement should secure Croatia a supply of natural gas over the next thirty-five years and ensure a support mechanism to the country’s long-term economic development goals. According to the agreement, Plinacro, the Croatian gas operator, and Gazprom will form a joint venture in which each will hold fifty percent of the shares. The joint venture will own and operate the pipeline.16 The agreement covers a thirty year period and, unless otherwise agreed, is automatically renewed for the next five years. The international tender for preparing a feasibility study is on course and the study is planned for completion by December 30, 2010. Based on the results of the feasibility study, Plinacro and Gazprom will decide whether to proceed with the construction of the pipeline. In September 2010, the Croatian Government accepted eighteen energy investment projects, worth =C3.85 billion.17 The energy projects refer to investments in: two thermal power plants (Plomin, Sisak C); eight hydroelectric power plants (Ombla, Molve 1 i 2, Kosinj, etc.); reconstruction of several oil terminals (Omis̆alj, Zitnjak, Gazenica etc.); construction of a new oil terminal near Split; construction of a future storage facility of natural gas near Grubisno Polje in eastern Croatia; and construction of a biomass power plant near Zagreb. The projects are planned to be implemented by state-owned companies and local authorities, including the Croatian national electricity company (HEP), the gas operator Plinacro, and JANAF (an oil pipeline system manager). One of the most important and promising projects is the construction of a coal-based thermal power plant in Istria called Plomin 3. There are two coal-based thermal power plants at the same location called Plomin 1 and Plomin 2. Plomin 3 will replace Plomin 1. It is expected that Plomin 3 will produce fifteen percent of the total amount of electricity generated in Croatia.18 The investment is worth approximately =C800 million. Potential investors in the project will be invited through a public tender, which is expected to be announced at the end of 2010 or the beginning of 2011 at the latest. The new plant is expected to be put into operation by the year 2016. Because the construction of LNG terminal in Omisalj has been postponed by investors until 2014, the Government decided to construct a small, “temporary’’ floating LNG terminal. The total investment is worth =C50 million.19 The terminal’s capacity is expected to be six billion cubic meters of gas per annum. Investors will be secured through public tender, which should be announced at the end of 2010. The “temporary” LNG terminal 15. See Russia and Croatia Sign Agreement on South Stream Gas Project, GOV’T OF THE REPUBLIC OF CROAMar. 2, 2010, http://www.vlada.hr/en/naslovnica/novosti_i_najave/2010/ozujak/hrvatska_i_rusija_ potpisale_sporazum_o_plinovodu_juznom_toku. 16. Id. 17. Croatian Government Greenlights 30 Public Sector Investment Projects Worth EUR 13.85 bln, EKONOM, Sept. 27, 2010, http://www.emg.rs/en/news/region/133831.html. 18. Miroljub Macesic & Ivana Manovelo, Energy & Natural Resources – Croatia: Government Approves New Energy Investment Projects, INT’L L. OFFICE, Nov. 8, 2010, http://www.internationallawoffice.com/newsletters/detail.aspx?g=250149a4-2234-4b67-9705-032cb538e98f. 19. Update 1–Croatia Plans to Install Floating LNG Terminal, REUTERS, Oct. 18, 2010, http://uk.reuters.com/ article/2010/10/18/croatia-gas-idUKLDE69H1B320101018. TIA, VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ENERGY & NATURAL RESOURCES 301 will not replace the originally planned large one, but instead represents a temporary solution until construction of the land-based terminal. Following the new Energy Strategy of the Republic of Croatia passed in 2009,20 Croatia started several important energy projects in 2010, which should ensure Croatia’s efficient, safe, and high quality energy supply during the coming years. V. Ecuador On June 25, 2010, several reforms to the Hydrocarbons Act were passed21 after a controversial process of approval in the National Assembly. These reforms have strongly influenced the landscape of hydrocarbons in Ecuador. The law intended to generate strong changes in several points of the oil industry: activities of state agencies, the role of the government in the operations of the oil fields, and a model contract to be signed with foreign companies. Additionally, the law established a four and six month mandatory period during which the companies must renegotiate their current contracts with the Ecuadorian government. First, the model of a state owned company (SOC) that, at the same time, represents the national government through contracts with private companies, has been abandoned. Petroecuador, the SOC that had that dual role, is now only an operator and is only in charge of areas where it has direct operation. The administering of the contracts, as well as of hydrocarbon resources and information, is now an activity of the Secretary of Hydrocarbons. Second, the law confirms the mandate included in the Ecuadorian Constitution that establishes that non-renewable resources should be exploited by the SOCs, and, only in the event that they do not have enough capacity, the government may then sign contracts with private companies. Finally, the contract to be signed between the government and private companies has been modified. The government has not adopted the joint operation agreement which is the common model used around the world. Instead, it utilizes the model services contract, under which the private company will receive a U.S. dollar payment per barrel of oil, no matter what the market price is. The contract has several provisions that are intended to protect government rights in case the oil price drops sharply. Currently, there is a process of renegotiation of the current contracts, which will last until the end of November 2010 or January 2011, depending of the type of contract currently enforceable. If the renegotiation process is not successful, the government will terminate the existing contracts and indemnify the companies for the non-amortized investments. During the last half of the year, the Republic of Ecuador signed with the Export-Import Bank of China (Eximbank) a contract to finance the construction of “Coca Codo Sinclair” hydroelectric generation project. The amount of the credit is approximately US$1.682 20. Energy Strategy of the Republic of Croatia, OFFICIAL GAZETTE 2009, No. 130, http://narodnenovine.nn.hr/clanci/sluzbeni/2009_10_130_3192.html. 21. Ley Reformatoria a la Ley de Hidrocarburos y la Ley de Régimen Tributario Interno, Julio 27, 2010, REGISTRO OFICIAL SUPLEMENTO No. 244 (Ecuador), available at http://www.derechoecuador.com/index2. php?option=com_content&do_pdf=1&id=5670. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 302 THE INTERNATIONAL LAWYER million, which represents eighty-five percent of the budget required.22 With the help of national income, the Ecuadorian government will finance the remaining fifteen percent. This credit will be paid out over fifteen years with an interest rate of 6.9%. The Ecuadorian President, Rafael Correa, highlighted that this is one of the major goals of the government because it will become the most important hydroelectric generation project in Ecuador, producing 1500 MWh, reducing the country’s dependence on imports and local fuel-generated electricity.23 To comply with the regulations of the Organic Public Companies Act, enacted in 2009, the Ecuadorian Government transformed the Coca Codo Sinclair S.A. company into the COCASINCLAIR Public Company (EP or Empresa Publica).24 The new company has its own working capital and budgetary, financial, economic, and administrative autonomy, with its headquarters in Quito, capital of Equador. VI. Equatorial Guinea This year was a busy one in Equatorial Guinea’s energy sector. The year saw three production sharing contracts being entered into in the country’s offshore area (Blocks T, U, and K) and also several oil and gas discoveries, notably by U.S. independent oil company, Noble Energy. It was also an interesting year in terms of energy infrastructure projects with negotiations ongoing for: the country’s second LNG train; the construction of a storage and handling terminal for crude oil and petroleum products; and the projected construction of a 20,000 bpd refinery, designed to produce gasoline, diesel, jet A-1, fuel oil, and possibly asphalt. A Memorandum of Understanding was also signed on September 24, 2010, between the country’s petroleum authorities, the national oil company (GEPetrol), and South Korea’s national oil company, the Korean National Oil Corporation (KNOC), aimed at strengthening relations between the two countries to develop opportunities in the hydrocarbons sector.25 Finally, 2010 saw the Ministry of Mines, Industry, and Energy issue long-awaited regulations on Decree 56/2007, of September 9, 2007, which had granted GEPetrol exclusive powers with respect to insurance for oil and gas-related operations. Under Order 3/2010, GEPetrol’s privileges and rights relating to the insurance industry are transferred to the newly created GEPetrol Seguros.26 Additionally, the new statute appears to require that all companies doing business in Equatorial Guinea’s oil sector must take out and maintain insurance for their operations with GEPetrol Seguros. 22. Ecuador Sella Credito Chino para Coca Codo, EL UNIVERSO (Ecuador), June 4, 2010, http://www. eluniverso.com/2010/06/04/1/1447/ecuador-sella-credito-chino-coca-codo-II.html. 23. See id. 24. See Decreto No. 370, Junio 3, 2010, REGISTRO OFICIAL SUPLEMENTO No. 206 (Ecuador), available at http://www.derechoecuador.com/index2.php?option=com_content&do_pdf=1&id=5611. 25. Cooperation Agreement Between the Ministry of Mines, Industries, and Energy and Korea National Oil Corporation, EQUATORIAL GUINEA, Jan. 10, 2010, http://www.guineaecuatorialpress.com/noticia.php?id=924&lang =en. 26. See Miranda Correia Amendoeira & Associados, Guinea Ecuatorial, NOTICIAS DEL DERECHO (JulySept. 2010), http://images.excentric.pt/documentos2/87/25/0002587.pdf. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ENERGY & NATURAL RESOURCES 303 VII. Gabon In a sign that the country’s petroleum sector may still have a bright future, 2010 saw Gabon’s estimated oil reserves stabilize and, according to some estimates, increase. The country also tried to promote its presalt potential, as part of its coastline was linked to Brazil’s during the Triassic Period. In line with this new enthusiasm, a licensing round for the granting of exploration and production rights was scheduled to take place, but was postponed a number of times, and is now expected to kick-off in 2011. The country also took a major step to optimize its gas potential, while reducing carbon emissions, by means of Ministerial Order 00827/MMPH/SG/DGH/DAEJF, of January 28, 2010, which sets forth penalties for gas flaring. Beginning on January 1, 2011, all gas flaring will be fined and the penalty will be calculated based on the official sale price of the quality of the crude oil extracted from the relevant area of exploitation, increased by 25% (2011), 50% (2012), 75% (2013), and 100% (2014); an equivalent oil barrel being equal to 165 m3, according to the Order. In addition, beginning on January 1, 2015, any amount of gas flared in breach of legal and regulatory provisions shall result in the loss of the rights entrusted within the area subject to a Production Sharing Contract (PSC) or concession. These measures are also applicable to oil companies that dispose of the gas by methods other than flaring. But, flaring required to resolve urgent as well as safety-related situations or for the depressurization of the gas treatment equipment during regular maintenance activities, is still allowed. VIII. Japan Renewable energy plays a central role in Japan’s energy policy and is assisted by existing government legislation; however, Japan still needs a robust regulatory framework to deliver its Copenhagen Accord commitments of achieving a twenty-five percent reduction of CO2 from 1990 levels by 2020.27 On March 12, 2010, the Cabinet approved the “Basic Act on Global Warming Countermeasures.” The bill “called for reducing 25 per cent of greenhouse gas emissions by 2020, with a 80 per cent reduction by 2050, and raising the share of renewable energy to 10 per cent by 2020, while realizing sustained economic growth.”28 The bill was designed to provide a legislative framework to achieve this goal, with the introduction of various measures promoting the use of renewable energy, feed-in tariffs, and a mandatory domestic emission-trading scheme (ETS). The purpose of the bill was: to address climate change under a fair and effective international framework in which all major economies participate. In light of these points, in order to contribute to the global greenhouse gas emissions reduction and bring about a society that emits as little greenhouse gas as possible, Japan will promote global warming countermeasures while ensuring economic growth, stable employment and stable supply of energy. It 27. See Japan Technology Transfer to Developing World Way to Cut Greenhouse Gas Emissions, Says UNIDO Director-General, U.N. INDUS. DEV. ORG., June 16, 2010, http://www.unido.org/index.php?id=7881&tx_tt news[tt_news]=485&cHash=0a77710afb1951b8253fc23ed6deec79. 28. Id. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 304 THE INTERNATIONAL LAWYER will also contribute to conserving the global environment and to ensuring the present and future healthy and culturally-rich lives of the Japanese people.29 This bill has since drifted in uncertainty due to political confusion caused by Prime Minister Yukio Hatoyama’s resignation in June of this year and the subsequent political discord caused by the results of the Upper House elections in July. It failed to pass the National Diet (Japan’s bicameral legislation). Renewable technology and domestic efficiency present significant opportunities for Japanese foreign investment. Development of an investment policy for renewable technology remains a legislative priority in order to facilitate these opportunities, because business and government transactions will have to interface with the developing regulations, which are currently unclear. IX. Mozambique Late 2009 and 2010 saw important oil and gas discoveries offshore of Mozambique as well as some significant legislative and regulatory developments. Through Resolution No. 62/2009, of October 14, 2009, the Council of Ministers approved the Policy for the Development of New and Renewable Energies, with the aim of setting forth the specific principles and objectives to promote the use and exploitation of existing energy resources. It is also intended to create an attractive venue of investment for this sector, generate income, and create more employment, consequently contributing towards the fulfilment of Mozambique’s energy requirements, particularly in rural areas. This policy is aimed at supplementing the matters addressed in the Energy Strategy approved by the Council of Ministries Resolution No. 10/09, on June 4, 2009.30 By way of Ministerial Diploma No. 272/2009, of December 30, 2009, the Ministry of Mineral Resources approved the new Licensing Regulations of Petroleum Facilities and Activities, which set forth the procedure, terms, and conditions applicable to the licensing, registration, and certification of petroleum facilities and activities, as well as the requirements for their renewal and transfer. Through Resolution No. 64/2009, of November 2, 2009, the Council of Ministers approved the Strategy for the Development of the Natural Gas Market. The strategy’s stated priorities are (i) the use of natural gas in projects with a major impact on the country’s development, (ii) the definition of tariff regulations for distribution grids to ensure reasonable end consumers prices, (iii) the promotion of research to enhance the potential of natural gas and attract prospective investors, (iv) the restriction of exclusive agreements with potential concessionaires and consumers in respect of proven reserves, (v) the disclosure of information to the public in connection with natural gas reserves that may be discovered, and (vi) the promotion of the participation of Mozambican companies in the natural gas industry in Mozambique. Finally, the Council of Ministers, through Decree No. 67/2009, of December 11, 2009, created the National Agency for Nuclear Energy (ANEA) with the purpose of ensuring 29. Overview of the Bill of the Basic Act on Global Warming Countermeasures (Provisional Translation), MINISENV’T, GOV’T OF JAPAN, http://www.env.go.jp/en/earth/cc/bagwc/overview_bill.pdf (last visited Jan. 28, 2010). 30. See Kiernan et al., supra note 2, at 372. TRY OF THE VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ENERGY & NATURAL RESOURCES 305 the safety and protection of persons, property, and environment against radiation exposure risks. In order to standardize the mechanisms applicable to the licensing and concessions for the private use of water resources, the Ministry of Public Works and Housing approved the water license and concession model forms by way of Ministerial Diploma No. 7/2010, of January 6, 2010. X. New Zealand At the beginning of 2009, New Zealand’s Energy and Resources Minister, Gerry Brownlee, said “The government has concerns about security of supply, the affordability of electricity, and duplication of electricity sector governance.”31 By the end of 2009, New Zealand’s Ministerial Review of Electricity Market Performance revealed twenty-nine measures to improve prices for consumers, improve supply, improve governance, reduce costs, and increase market competition. To achieve these measures, legislation to enact the Ministerial Review’s recommendations was passed in Parliament on September 23, 2010, ushering in a new era for the electricity sector with the establishment of the Electricity Industry Act 2010.32 While it is not yet clear how this legislation will impact the New Zealand energy sector, the market is already beginning to shift in anticipation. The legislation will introduce redistribution of State Owned Enterprise generation assets, abandonment of the reserve energy scheme, and the development of a more fluid hedge market through increased competition and standardized contracts. Changes to the electricity governance regime, outlined in the Energy Industry Act, will require revision to existing level arrangements from November 1, 2010.33 These arrangements determine how costs governing the industry are allocated to various levels of levy payers. With the establishment of the Electricity Authority and replacement of the Electricity Commission, the new agency is “responsible for promoting competition, reliable supply and efficient operation of the electricity market” of New Zealand.34 In July, Parliament released a Draft New Zealand Energy Strategy (NZES) and a Draft New Zealand Energy Efficiency and Conservation Strategy (NZEECS) for public consultation. This will drive the development of legislation for further focus on the promotion of energy efficiency, conservation, and renewable energy generation. In the energy retailer subsector, government legislation, as of October 2010, requires retailers “to switch customers within 10 working days of being asked, and half of all 31. Press Release, Gerry Brownlee, Energy and Res. Minister, N.Z., Ministerial Review of Electricity Market (Apr. 1, 2009), available at http://www.beehive.govt.nz/release/ministerialeviewl̃ectricityārket. 32. See Implementing the 2009 Electricity Market Review Recommendations, MINISTRY OF ECON. DEV. (N.Z.), http://www.med.govt.nz/templates/ContentTopicSummary____43211.aspx (last visited Jan. 28, 2010). 33. Jim Stevenson et al., Legal Update - Electricity Industry Act–Some Changes for Electricity Lines Businesses, BUDDLE FINDLAY, Sept. 27, 2010, http://www.buddlefindlay.com/article/2010/09/27/legal-update-electricity-industry-act-some-changes-for-electricity-lines-business. 34. Press Release, Gerry Brownlee, Energy and Res. Minister, N.Z., Electricity Authority to be Established on 1 November (Sept. 15, 2010), available at http://www.beehive.govt.nz/release/electricity+authority+be+ established+1+november. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 306 THE INTERNATIONAL LAWYER switches must occur within five working days.”35 Under previous legislation, this rule allowed a switch of retailer to take up to twenty-three working days. This is a push from the government to allow consumers the ability to shop around for the lowest prices and further drive competition in the market. The largest oil sector development in New Zealand came in January, when the government closed the offer to successful bidder Petrobas with a “five-year exploration permit, covering 12,333 square kilometers” over the Raukumara Basin off the North Island’s East Coast.36 Subsequently, in May, the government announced a major two-year program to promote oil and gas exploration through the contracting of GNS Science to deliver the $7.6 million Petroleum Exploration and Geosciences Initiative (PEGI) Project.37 Also in May, the government announced plans to join the International Renewable Energy Agency.38 Minister Brownlee stated: “In 2009, 73 percent of our electricity came from renewable sources. The Government . . . [aims] to increase to 90 percent . . . by 2025.”39 Gas industry regulation brought about significant change this year. In November 2010, backstop regulation to address potential difficulties for consumers and the industry came into effect on November 16. This legislation (Gas Governance (Insolvent Retailers) Regulations 2010) establishes a safe path for customers of insolvent retailers.40 XI. Portugal The National Energy Strategy for 2020 (ENE 2020) was approved by the Council of Ministers Resolution 29/2010 on April 15, 2010.41 The Strategy resolved: (i) to create a Balanced Tarifktuf Fund by 2012; (ii) to create an Energy Efficiency Fund (FEE); (iii) to promote the Iberian Gas Market (MIBGAS); (iv) to develop during the first semester of 2010 lines of support for investments in renewable energy sources and promotion of energy efficiency; (v) to create the Iberian Centre for Renewable Energy Sources and Energy Efficiency (CIEREE) in Badajoz by the end of 2012; (vi) to develop in Évora, by the end of 2011, a pilot experiment that includes the decentralised production of energy, smart-charging of electric vehicles; (vii) to promote changes in the legal framework by 2012, in compliance with EC directives, liberalizing the electricity and gas markets, pro35. Press Release, Gerry Brownlee, Energy and Res. Minister, N.Z., Switching Power Companies Made Easier (July 27, 2010), available at http://www.beehive.govt.nz/release/switching¶owerompaniesādeãsier. 36. Press Release, Gerry Brownlee, Energy and Res. Minister, N.Z., Petrobas Awarded Big Exploration Permit (June 1, 2010), available at http://www.beehive.govt.nz/release/petrobras+awarded+big+exploration+ permit. 37. Press Release, Gerry Brownlee, Energy and Res. Minister, N.Z., Major Petroleum Project Begins (May 25, 2010), available at http://www.beehive.govt.nz/release/major-petroleum-project-begins. 38. Press Release, Gerry Brownlee, Energy and Res. Minister, N.Z., New Zealand to Join International Renewable Energy Agency (May 11, 2010), available at http://www.beehive.govt.nz/release/new+zealand+join +international+renewable+energy+agency. 39. Press Release, Pansy Wong, Ministry of Energy and Res., N.Z., Renewable Energy Core as a Core Option for Low-Carbon Society (June 22, 2010), available at http://www.beehive.govt.nz/speech/renewableñergyore+option+low-carbon§ociety. 40. Press Release, Gerry Brownlee, Energy and Res. Minister, N.Z., Gas Industry Regulations Take Affect (Nov. 16, 2010), available at http://www.beehive.govt.nz/release/gasņdustryegulationsake+affect. 41. Portugal: The Challenge of ENE 2020, IFLR, Sept. 1, 2010, http://www.iflr.com/Article/2664254/Portugal-The-challenge-of-ENE-2020.html. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ENERGY & NATURAL RESOURCES 307 tecting consumers and promoting competition; (viii) to update the regulatory framework for over-equipment installation in wind power stations by simplifying procedures, reviewing applicable fees and providing for the obligation of installation of equipment designed to bear voltage sags; and (ix) to create conditions for the introduction and mass-use of electric vehicles. Over-equipment is the name given to the set of turbines designed to increase the power produced in a given wind farm, which amongst others have the following advantages: (i) it has a minor impact on the environment, compared to the installation of new wind farms and (ii) rationalization of the use of the existing infra-structure. The Energy Efficiency Fund (FEE) was approved by Decree-Law 50/2010, of May 20, 2010, and aims at financing programs and measures provided for in the National Energy Efficiency Action Plan (PNAEE) included in the Council of Ministers Resolution 80/ 2008, May 20, 2008. Decree-Law 51/2010, of May 20, 2010, simplified equipment (wind generators) installation procedures in wind power stations. It also reviewed the respective fee framework. This Decree establishes the duty to install equipment capable of bearing voltage sags in every wind generator and to enable a reactive energy supply during such sags, while maintaining the previously granted possibility of equipment up to 20% of power injection capacity in the Public Electric Network (RESP). The procedure applicable to the elimination of regulated tariffs in the sale of electricity to end-users of extra high voltage, high voltage, medium voltage, and special low voltage was set forth by means of Decree-Law 104/2010, of September 29, 2010. Decree-Law 30/2010, of April 8, 2010, which partially transposed into domestic law Directive 2009/29/CE, passed by the European Parliament and the Council on April 23, 2009, has amended the legal framework of greenhouse gas emission permits marketing enacted by Decree-Law 233/2004 of December 14, 2004. Decree Order 993/2010, of September 29, 2010, sets out the fee due to the Portuguese Environment Agency for access and use of the Portuguese Registry of Emission Licenses (PREL). XII. São Tomé e Prı́ncipe After entering the oil and gas scene through its Joint Development Zone with Nigeria in late 2009 and 2010, São Tomé e Prı́ncipe started preparing the legal framework for petroleum activities in the country’s Exclusive Economic Zone. First, the country passed a new Petroleum Activities Law (“PAL”), approved by means of Law No. 16/2009 of December 31, 2009. The PAL deals with such matters as exploration and production access rights, licensing requirements applicable to survey operations, tendering procedures for the award of petroleum contracts, award of petroleum rights by direct negotiation, and minimum content of the Production Sharing Agreements. Under the PAL, the country has also adopted a model Production Sharing Agreement that should be the grounds for negotiation of future petroleum contracts. By way of Decree-Law No. 52/2009 of December 31, 2009, the São Tomé e Prı́ncipe Government also delineated its Economic Exclusive Zone (EEZ) and created three areas for the exploration and exploitation of petroleum and natural gas. The areas have been offered for competitive bidding of oil exploration and production rights. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 308 THE INTERNATIONAL LAWYER Pursuant to the ratification of the U.N. Convention on Climate Change and the Kyoto Protocol, Decree 59/2009 of December 31, 2009, established the National Committee for Climate Change (CNMC) to concentrate, manage, educate, and promote all matters related to climate change, including measures and policies aimed at reducing greenhouse gas emissions. Published on the same date was the Law passed by the Angolan Parliament to implement “the Vienna Convention and the Montreal Protocol on Substances that Deplete the Ozone Layer, thereby requiring a special authorization (from the Minister of Commerce, after endorsement by the Minister of Environment) for the importation of products included in Annexes A, B, C, and E of the Montreal Protocol.”42 XIII. Spain A. REGULATION OF THE SECURITIZATION OF THE DEFICIT IN THE ELECTRICITY MARKET The electricity market has suffered a deficit because of the difference between the income and market costs. This imbalance is due to a miscalculation of the annual costs forecast by the Government. This is, in part, due to political decisions. The Government has approved electricity charges since the year 2000 based more on desired costs rather than the real costs of the energy supply. The main reasons why the Government did not approve costs that are more realistic were (i) the inflationary impact on energy costs and (ii) its effect on the competitiveness of those sectors with high-energy consumption. To finance this deficit, the Government can securitize it by issuing bonds guaranteed by the State, and by assignment of the corresponding collecting rights to a securitization fund (the Securitization Fund of Deficit of the Energy Sector). In this context, Royal Decree 437/2010 regulates the assets and liabilities of the fund.43 The aim of this Royal Decree, regarding assets, is to state the price and assignment conditions of the collecting rights. Regarding liabilities, it provides the basis for a competitive proceeding by means of which the financial instruments of the fund will be issued. B. AMENDMENT THE OF ENERGY SECTOR REGULATIONS FREE ACCESS TO IN ORDER TO ADAPT THEM TO SERVICES This year the Spanish Government passed Law 17/2009 incorporating into Spanish legislation Directive 2006/123/CE. The law consolidates regulatory principles to make them compatible with the basic freedoms of establishment and the rendering of services. The main characteristic of this regulation is the principle of that the exceptionality of a requirement for authorizations should be exceptional. The main characteristic of this regulation is the principle of the exceptionality of authorizations. 42. Id. 43. Royal Decree 437/2010 (B.O.E. 2010, 6291) (Spain), available at http://www.boe.es/boe/dias/2010/04/ 21/pdfs/BOE-A-2010-6291.pdf. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ENERGY & NATURAL RESOURCES 309 Two Royal Decrees have been enacted to adapt energy sector regulations to Law 17/ 2009. Royal Decree 197/201044 adapts some provisions regarding the hydrocarbon sector such as the Regulation of the Oil Liquefied Gases Distribution Activity. It eliminates the requirement to obtain an authorization to carry out this activity. Royal Decree 1434/ 2002, which regulates the transport, distribution, commercialization, supply, and authorizations of natural gas, is also modified by eliminating the requirement to obtain an authorization in order to operate in the sector.45 The second Royal Decree that has been enacted is Royal Decree 249/2010.46 It modifies provisions of the energy and mining sector. This Royal Decree amends the regulation on Basic Mining Security (Royal Decree 863/1985), with regard to the authorization by the Mining Authority of persons that may make electrical installations. It also amends the Regulation on heating installations (Royal Decree 1027/2007), in order to adapt the regime of these installation companies to the European Directive. It defines the proceeding for the free rendering of these services in Spain and creates a registry for these installation companies, among others. XIV. Timor-Leste Although there were no significant legal developments in Timor-Leste in 2010, the country has been buzzing with energy-related developments. On the one hand, oil companies are preparing to commence drilling exploration wells in the country’s Exclusive Economic Zone, which are expected to confirm the country’s oil and gas potential. Additionally, after several sessions of hard negotiations, it now seems that there may be a light at the end of the tunnel for the Greater Sunrise gas project. Woodside Petroleum appears to have taken a more flexible approach and will be considering the State of Timor-Leste’s preferred route for exploiting the Sunrise gas fields—an LNG plant located on the country’s south coast. On the other hand, the government and regulatory agencies have been preparing various important statutes and regulations to govern the country’s energy sector. The National Petroleum Authority (ANP) has been engaged in the preparation of statutes aimed to govern Timor-Leste’s downstream petroleum sector, which has lacked supervision and regulation. The government has also started discussing amendments to the country’s important Petroleum Fund Law and its oil and gas exploration and production legal framework. Finally, various government departments have been running pilot programs in the Districts for the use of renewable and alternative energy sources, such as natural gas seeps and biomass, to generate electrical power. 44. Royal Decree 197/2010 (B.O.E. 2010, 4511) (Spain), available at http://www.boe.es/boe/dias/2009/11/ 24/pdfs/BOE-A-2009-18731.pdf. 45. Royal Decree 1434/2002 (B.O.E. 2010, 25421) (Spain), available at http://www.boe.es/aeboe/consultas/ bases_datos/doc.php?id=BOE-A-2002-25421. 46. See Royal Decree 249/2010 (B.O.E. 2010, 4514) (Spain), available at http://www.boe.es/boe/dias/2010/ 03/18/pdfs/BOE-A-2010-4514.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 310 THE INTERNATIONAL LAWYER XV. Turkey The renewable energy market is rapidly growing in Turkey with the promotion of energy investments, notably in the wind energy sector, by the Energy Market Regulatory Authority (the “EMRA”), after the enactment in 2005 of Turkey’s first renewable energy law, Law No. 5346 Concerning the Use of Renewable Energy Resources for the Generation of Electrical Energy (the “Law”).47 Turkey opened up its wind energy market in 2007 and EMRA started to collect license applications for wind energy that resulted in applications in the amount of twice the installed capacity of Turkey, which is 78,000 MV. This deep interest toward wind energy resulted from suspension of the granting of wind energy licenses by EMRA for a while. Apart from wind energy, Turkey also has considerable potential in solar energy from which electricity generation has not yet been permitted by the EMRA. However, a draft of the amendments to the Law (the “Draft Law”) has been finalized and approved by the relevant parliamentary committee and is currently awaiting enactment by Parliament. Presently, there have been no licenses granted for solar energy in Turkey due to the lack of legislation. However, the Draft Law aims to fill such regulatory deficiency in the solar energy market and the EMRA shall begin to grant licenses based on solar energy as of the date of enactment of the Draft Law. Applications for solar energy are expected to be similar in volume to that of wind energy. The Draft Law designates the Renewable Energy Resource Mechanism (the “RER Mechanism”), which brings number of benefits in favor of the legal entities using the renewable energy resources for the generation of electrical energy. Separate pricing for each renewable energy resource is the most significant benefit of the Draft Law. Currently, the Law sets forth the purchase price of the electricity generated from various renewable energy resources as 5-5.5 Euro cent/kWh.48 This price is below the actual market price of the electricity; and accordingly, is not an incentive in practice. However, the Draft Law sets forth separate prices for each renewable energy resource and promotes the price set forth under the Law. Pursuant to the Draft Law, Schedule No.1 (the “Schedule-1”) shall apply to generation plants (i) which commence to operate before December 31, 2015 and (ii) which are subject to the RER Mechanism. Apart from separate pricing for each renewable energy resource, the Draft Law provides that the prices in the Schedule No. 2 (the “Schedule-2”) attached to the Draft Law shall be added to the prices in Schedule-1 for 5 years following the operation date, provided that the generation facility using the renewable energy resource (i) commences to operate before December 31, 2015, and (ii) uses mechanic and electronic spare parts, components, and equipment manufactured in Turkey. In addition to all other incentives, the legal entities using renewable energy resources to generate electricity shall pay system utilization fees with a reduction of 15 percent over a ten-year period, beginning as of the operation date. 47. Law on the Utilization of Renewable Energy Resources for the Purpose of Generating Electrical Energy, Law No. 5346 (2005) (Turkey), available at http://www.eie.gov.tr/duyurular/YEK/LawonRenewableEnergyReources.pdf. 48. Hydropower in Turkey: Potential and Market Assessment, INTPOV (2010), available at http://www. econ.no/stream_file.asp?iEntityId=4732 (last visited Jan. 29, 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW ENERGY & NATURAL RESOURCES 311 In conclusion, following the enactment of the Law Turkey as well as the EMRA, as the competent authority, took considerable steps in respect to renewable energy use for the generation of electrical power. As a first step, the EMRA opened up the wind energy sector by means of accepting license applications in 2007. Nevertheless, it is envisaged that the electricity generation from solar energy, as the second step of this phase, will be allowed by the EMRA as of the date of enactment of the Draft Law. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW International Transportation Law MARK J. ANDREWS, JAMES H. BERGERON, LEENDERT CREYF, CATHERINE ERKELENS, LORRAINE B. HALLOWAY, GERALD F. MURPHY, AND DOUGLAS SCHMITT* I. United States Aviation Regulatory Developments A. DOT CONSUMER PROTECTION RULES Consumer protection and aviation safety issues dominated the U.S. regulatory scene during 2010. On December 30, 2009, the U.S. Department of Transportation (“DOT”) published a final rule that requires, among other things, that U.S. carriers adopt contingency plans for lengthy tarmac delays that include an assurance that a carrier will not permit an aircraft to remain on the tarmac for more than three hours in the case of domestic flights and for more than a set number of hours, as determined by a carrier, for international flights, without providing passengers an opportunity to deplane. Exceptions to the rule are permitted for safety, security, or air traffic control-related reasons.1 The rule, known as the “tarmac delay” rule, or phase one of DOT’s consumer protection effort, became effective on April 29, 2010.2 Less than two months later, DOT began phase two by issuing a wide-ranging notice of proposed rulemaking that would not only extend the * This article was compiled by Gerald F. Murphy and Julien Meyer. Gerald F. Murphy is a Counsel in the Aviation and Corporate Groups at Crowell & Moring, LLP in Washington, D.C., and Julien Meyer is a French-trained lawyer licensed in Louisiana currently working as a paralegal in the Admiralty/Maritime Group at LeBlanc Bland PLLC in New Orleans, Louisiana. Section I on United States Aviation Regulatory Developments was written by Lorraine B. Halloway, a Partner in the Aviation and International Trade Groups at Crowell & Moring LLP, and Gerald F. Murphy. Section II on European Aviation Law was written by Leendert Creyf, Senior Associate, and Catherine Erkelens, Partner of the Aviation & Aerospace Group of Bird & Bird LLP in Brussels, Belgium. Section III on the “Rotterdam Rules” was written by Mark J. Andrews, Partner-in-Charge for the Washington, D.C. office of Dallas-based Strasburger & Price, LLP, and Douglas Schmitt, a partner with Alexander Holburn Beaudin & Lang LLP in Vancouver, British Columbia, Canada. Section IV on Developments in European Maritime Law was written by James H. Bergeron, a Political Advisor with the NATO Strike Force in Naples, Italy (contribution made in his personal capacity). 1. See Enhancing Airline Passenger Protections, 74 Fed. Reg. 68,983 (Dec. 30, 2009). 2. See id. However, the DOT subsequently extended the effective date for the requirement that airlines update flight delay data on their websites for two months (see Posting of Flight Delay Data on Web Sites, 75 Fed. Reg. 42,599 (July 22, 2010)) and denied requests of five airlines for a temporary exemption from the new rule at New York area airports due to construction on the main runway at John F. Kennedy International Airport. See Press Release, Dept. of Transp., DOT Denies Requests for Waiver of Tarmac Delay Rule (Apr. 22, 2010). 313 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 314 THE INTERNATIONAL LAWYER tarmac delay rule to foreign airlines and to more airports but would also establish new and/or expanded requirements on a broad range of other issues, including denied boarding compensation, full-fare advertising, and peanut allergies.3 The phase two rule, generally opposed by U.S. and foreign airlines alike, remains pending. B. FAA FLIGHT AND DUTY TIME RULEMAKING More recently, on September 14, 2010, the Federal Aviation Administration (“FAA”) published a new proposed rule, “Flight Crewmember Duty and Rest Requirements” (the “NPRM”), that would impose one level of safety on all U.S. commercial flight operations, in contrast to the current rules, which recognize differences between types of operations, whether a flight carries passengers or cargo.4 This FAA rulemaking grew out of a February 2009 fatal crash of a regional aircraft in Buffalo, New York, which ended the longest period in U.S. aviation history without a passenger fatality5 and subjected the industry to unprecedented media scrutiny and congressional hearings on pilot experience, training, fatigue, rest, training, and related issues. Pointing to a congressionally-imposed deadline for implementing a new rule,6 the FAA denied requests from numerous stakeholders to extend the November 15, 2010 due date for an extension of time to comment on this complex and highly controversial proposal.7 In its comments, the Air Transport Association (“ATA”) supported the goals and certain core elements of the proposal, including science-based flight duty periods, reasonable cumulative flight duty period limits, and realistic minimum rest requirements, but it objected to the “one-size-fits all” approach eliminating current regulatory distinctions between different types of operations, and it criticized various aspects of the proposal as unnecessary, overly restrictive, or lacking in scientific and operational support.8 Characterizing the NPRM as “overloaded with duplicative rules that subject the U.S. industry, passengers, and shippers to unjustified economic burdens and adverse service consequences”9 and “not based on science,”10 the ATA urged the FAA to withdraw and revise the NPRM. In contrast, the Airline Pilot Association (“ALPA”) supported the FAA’s determination that “one level of safety with regard to fatigue should apply equally to all Part 121 certificate holders”11 and praised “the FAA’s and industry’s desire to move forward with a regulation that is scientifically supported to 3. Enhancing Airline Passenger Protections II, 75 Fed. Reg. 32,318 (June 8, 2010). 4. Flightcrew Member Duty and Rest Requirements, 75 Fed. Reg. 55,852 (Sept. 14, 2010). 5. Id. at 55,874. 6. The Airline Safety and Federal Aviation Administration Extension Act of 2010 (Public Law 111-216) imposed an August 2011 deadline on FAA to issue its new flight/duty/rest regulations, and FAA issued a notice of proposed rulemaking on Sept. 14, 2010. Flightcrew Member Duty and Rest Requirements, 75 Fed. Reg. at 55,854. 7. FAA Response to Comment Period Extension Requests for Flightcrew Member Duty and Rest Requirements, 75 Fed. Reg. 63,424, 63,425 (Oct. 15, 2010) (denying stakeholders’ extension requests on the grounds that the “[Aviation Rulemaking Committee] provided a forum for the aviation industry to give extensive input” and “to help ensure that we meet [Congress’s deadline that the FAA issue a final rule on pilot fatigue by Aug. 1, 2011]”). 8. Comments of the Air Transp. Ass’n, Notice of Proposed Rulemaking for Flightcrew Member Duty and Rest Requirements, Docket No. FAA-2009-1093, i (Nov. 15, 2010), available at http://www.airlines.org/PublicPolicy/Judicial/Documents/ATAFDTfinalcomments.pdf. 9. Id. at 5. 10. Id. 11. Id. at 1. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW TRANSPORTATION LAW 315 the maximum extent possible.”12 But, ALPA’s support for the NPRM was tempered somewhat by what it perceived to be “significant scientific gaps that still exist” in the fatigue studies and models relative to late-night operations, time zone changes, and age.13 The National Air Carrier Association (“NACA”) assailed the NPRM for “fail[ing] to consider the unique nature of the operations of non-scheduled carriers,” including carriers that are small businesses.14 While supporting the FAA’s objective of combating crew fatigue, the Regional Airline Association (“RAA”) raised concerns that “cover nearly the full range of the proposed regulation and its conceptual underpinnings.”15 Although the RAA presented alternative processes and language, it also questioned whether the breadth of its concerns could be resolved within the framework of the existing NPRM.16 The NACA and the ATA both emphasized the inadequacy of the FAA’s cost/benefit analysis, asserting that the FAA had significantly underestimated the costs and overestimated the benefits of the proposed rule.17 The FAA is currently reviewing stakeholder comments, which took several weeks to upload to the public docket in light of the volume received. C. IMMUNIZED ALLIANCES Following closely on the heels of the announcement that the United States and Japan had agreed to the terms of an Open Skies aviation agreement18 liberalizing the air transportation market between the two countries, Continental Airlines, United Airlines, and ANA (Star collectively) and American Airlines and Japan Airlines (Oneworld collectively), each sought grants of antitrust immunity (“ATI”) from the DOT that would allow the carriers to engage in joint pricing, sales and marketing, and revenue sharing on transpacific routes.19 Over relatively minimal opposition compared to other recent significant antitrust immunity proceedings,20 the DOT finalized its tentative approval21 and granted each of the Star and Oneworld applications for U.S.-Japan ATI on October 6, 2010.22 2010 also saw DOT finally grant ATI to another alliance between Oneworld carriers— American Airlines and British Airways, along with Iberia, Finnair and Royal Jordanian (AA/BA Oneworld collectively),23 after American Airlines and British Airways had failed 12. Id. at 2. 13. Id. 14. Id. at 1. 15. Id. at 4. 16. See id. 17. Id. at 25. 18. See Memorandum of Understanding between the United States and Japan (Oct. 25, 2010), available at http://www.state.gov/documents/organization/150284.pdf. 19. See DOT Order 2010-3-10, U.S.-Japan Alliance Case, Docket No. DOT-OST-2010-0059, 1-2 (consolidating applications of the Star Carriers and the Oneworld Carriers into a single proceeding). 20. See, e.g., Joint Application of Continental Airlines, et al., Docket No. DOT-OST-2008-0234 (adding Continental to the 9-way immunized group of Star Alliance carriers); Joint Application of Alitalia-Linee Aeree Italiane-S.P.A., et al., Docket DOT-2004-19214-0086, (bringing Northwest Airlines into the SkyTeam Alliance following KLM’s merger with Air France). 21. See DOT Order 2010-10-4, U.S.-Japan Alliance Case, Docket No. DOT-OST-2010-0059 (Oct. 6, 2010), 2010 DOT Av. LEXIS 441. 22. See DOT Order 2010-11-10, U.S.-Japan Alliance Case, Docket No. DOT-OST-2010-0059 (Nov. 10, 2010), 2010 DOT Av. LEXIS 483. 23. See DOT Order 2010-7-8, Joint Application of American Airlines, et al., Docket No. DOT-OST2008-0252 (July 20, 2010), 2010 DOT Av. LEXIS 327. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 316 THE INTERNATIONAL LAWYER on two previous occasions.24 DOT determined that the AA/BA oneworld alliance “would enhance competition by creating a viable third immunized alliance that is comparable to and competitive with the product and service offerings of [its] competitors, Star Alliance and SkyTeam, which have already received grants of antitrust immunity and are proceeding with their own alliance plans and integrated joint ventures.”25 As the central condition to its grant of ATI, however, the DOT required the applicants to: make available four slot pairs at London’s Heathrow International Airport to duly authorized airlines that are not affiliates of the applicants or members of Oneworld, for a period of up to ten years . . . at times that are usable for transatlantic services, for the purpose of introducing new services between the U.S. and London.26 D. CONTINENTAL AND UNITED MERGE TO CREATE THE WORLD’S LARGEST AIRLINE On May 3, 2010, Continental Airlines and United Airlines announced their proposed merger of equals, aimed at creating the world’s largest airline.27 Following the Department of Justice’s announcement that it had concluded its review of the proposed merger and that its antitrust concerns had been resolved by the transfer of take-off and landing slots at New York-Newark Liberty International Airport from Continental Airlines to Southwest Airlines on August 27, 2010,28 DOT granted an exemption allowing Continental Airlines, Continental Micronesia, Air Micronesia and United Airlines to operate under the common ownership of United Continental Holdings, Inc., pending action on the carriers’ application for the de facto transfer of international routes.29 While the carriers must remain separate entities and be operated as separate brands until the route transfer application is granted, this exemption order effectively cleared the way for the merger transaction, which closed on October 1, 2010.30 24. See Joint Applications of American Airlines, and British Airways, Docket Nos. DOT-OST-2001-10387 and DOT-OST-1997-2058. 25. DOT Order 2010-7-8, at 3 (citing Order 2010-2-8, at 2 (Feb. 13, 2010), 2010 DOT Av. LEXIS 153). 26. Id. at 57-58. Delta Airlines subsequently applied to operate Boston-London and Miami-London service using three of the available slot pairs. See Application of Delta Airlines, Docket DOT-OST-2008-0252 (Aug. 26, 2010). 27. See Press Release, United Cont’l Holdings, Inc., United and Continental Announce Merger of Equals to Create World-Class Global Airline (May 3, 2010), available at http://ir.unitedcontinentalholdings.com/ phoenix.zhtml?c=83680&p=irol-newsArticle&ID=1477955&highlight.=. 28. See Press Release, U.S. Dept. of Justice, United Airlines and Continental Airlines Transfer Assets to Southwest Airlines in Response to Department of Justice’s Antitrust Concerns (Aug. 27, 2010), available at http://www.justice.gov/atr/public/press_releases/2010/262002.pdf. 29. See DOT Order 2010-8-15, Application of Continental Airlines, et al., Docket No. DOT-OST-2010165 (Aug. 30, 2010), 2010 DOT Av. LEXIS 384. 30. See Press Release, United Cont’l Holdings, Inc., United and Continental Close Merger (Oct. 1, 2010), available at http://ir.unitedcontinentalholdings.com/phoenix.zhtml?c=83680&p=irol-newsArticle&ID=14780 14&highlight. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW TRANSPORTATION LAW 317 II. European Aviation Law A. AVIATION SECURITY: NEW FRAMEWORK, BODY SCANNERS, AND COSTS On April 29, 2010, the European Union’s revamped aviation security framework31 became fully applicable. Regulation 2008/300/EC, of which some provisions have been in effect since April 29, 2008, intends to streamline the security procedures and measures, drawing lessons from the experience gathered since 2002, when the E.U. adopted its first comprehensive aviation security legislation. Regulation 2008/300/EC, together with its implementing and supplementing legislation32 now looks to eliminate the duplication of security controls within controlled areas of airports, to establish common standards for training and identification of persons engaged in aviation security, and introduce common criteria for the recognition of entities involved in the process of air cargo so as to avoid the need for re-screening the cargo when shipments are passed on within a secure chain. Regulation 2008/300/EC also allows for the application of the so-called “one-stop security” concept between the European Union and specific non-E.U. countries that have equivalent levels of aviation security. One-stop security is, for example, applied between the E.U. and Switzerland. The attempted terrorist attack on a Northwest Airlines flight from Amsterdam to Detroit on December 25, 2009 stirred the debate33 on the feasibility and/or necessity of a widespread use of so-called ‘body scanners,’ i.e., scanners that allow for the creation of (full) body images so that a reviewer of these images can assess the absence of prohibited metallic or non-metallic items. Opponents of body scanners pointed to the breach of their fundamental rights and to health concerns related to the use of x-rays. The European Commission was asked to study the concerns and to report to the European Parliament and the Council. On June 15, 2010, the European Commission delivered its report in which it found that security scanners can enhance the quality of security controls at E.U. airports.34 But the manner in which these scanners are currently deployed and operated—each Member State sets its own conditions—can be improved. The Commission is in favor of imposing common European technical and operational requirements so as to ensure that health standards and European fundamental rights are respected. This report has not yet led to any change in legislation. During 2010, the debate on the costs of airport security continued over whether security should be paid for by taxpayers generally or by the users of air transport services. The debate follows a proposal for legislation by the European Commission that would establish a common framework regulating essential aspects of security charges.35 This legislation would codify the application of the principles of non-discrimination, consultation, 31. Commission Regulation 300/2008, Common Rules in the Field of Civil Aviation Security and Repealing Regulation 2320/2002, 2008 O.J. (L 97), 72 (EC). 32. See generally EUROPEAN COMM’N MOBILITY & TRANSP., http://ec.europa.eu/transport/air/security/ legislation_en.htm (last visited Jan. 30, 2011). 33. See, e.g., Press Release, European Comm’n, Transport: Vice-President Siim Kallas Addresses the European Parliament on the Use of Body Scanning Technology in Airport Security (Feb. 2010; IP/10/150). 34. Communication from the Commission to the European Parliament and the Council on the Use of Security Scanners at EU Airports, COM (2010) 311 Final (June 15, 2010). 35. Proposal for a Directive of the European Parliament and of the Council on Aviation Security Charges, COM (2009) 217 Final (May 11, 2009). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 318 THE INTERNATIONAL LAWYER transparency, and cost-relatedness to security charges. In its response to the Commission’s legislative proposal, the European Parliament proved determined to add provisions to the legislation—implying that where Member States decide to impose security measures that are more stringent than those required by basic E.U. requirements, the costs thereof must be borne by the Member State and may not be passed on to the airlines or passengers.36 The individual Member States, on the other hand, are opposed to any legislation that would require public financing of aviation security measures. The debate is far from over, and became even more complex when, in early November 2010, authorities uncovered a terrorist plot to carry explosives on cargo aircraft.37 B. VOLCANIC ASH CLOUD: IMPACT AND RESPONSE On April 15, 2010, Eurocontrol38 issued a press release stating that: “[b]ased on the guidelines of the International Civil Aviation Organization normal air traffic control services cannot be provided to flights in airspaces affected by volcanic ash. Therefore, several air navigation service providers have issued notifications to airlines requiring the temporary suspension of air traffic.”39 The eruption of the Eyjafjallajökull volcano caused the closure of sections of the European airspace between April 15 and April 21, 2010, cancelling more than 100,000 flights.40 It impacted passengers and airlines greatly and made clear that current structures and regulations make a coordinated and harmonized response to events of this magnitude and nature difficult. In the aftermath of the crisis, the Council agreed to various measures which should improve the E.U.’s response capability.41 These measures comprise the development of a European methodology and coherent approach to risk assessment and risk management, including the establishment at E.U. level of safety limits for the presence of volcanic ash in the air. The Council also called for an accelerated development of Functional Airspace Blocks—airspace designed for air traffic management purposes according to operational functionality instead of the current practice of basing it on national borders.42 36. See Press Releases, European Parliament, (1) Airport Charges: Security is Member States’ Responsibility, say MEPs (Mar. 1, 2010) and (2) Airport security: Member States should bear costs of extra measures (May 5, 2010). 37. See Memorandum from the European Comm’n on Air Cargo Sec. (Nov. 5, 2010). 38. Eurocontrol is an intergovernmental organization, with thirty-nine member states and to which the European Union has acceded. Eurocontrol’s mission is to harmonize and integrate air navigation services in Europe. About Us, EUROCONTROL, http://www.eurocontrol.int/corporate/public/standard_page/lp_about_ us.html (last visited Jan. 30, 2011). 39. Special Report on Volcanic Ash Cloud, EUROCONTROL, http://www.eurocontrol.int/corporate/public/ subsite_homepage/report-ash-cloud.html (last visited Jan. 30, 2011). 40. See Information Note to the Commission, at 2, SEC (2010) 533 Final (Apr. 27, 2010). 41. Press Release, Council of the European Union, EU Response to the Consequences of the Volcanic Ash Cloud for Air Transport (May 4, 2010). 42. SES I and II consolidated legislation: The 4 Regulations Creating the Single European Sky, EUROPEAN COMM’N, http://ec.europa.eu/transport/air/single_european_sky/single_european_sky_en.htm (last visited Mar. 22, 2011). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW TRANSPORTATION LAW 319 Faced with passenger concern, the European Commission repeatedly made clear43 that it considered the passenger rights legislation44 fully applicable during the volcanic ash crisis. Stranded passengers were entitled to care (e.g., snacks, drinks, etc.), communication (e.g., telephone, fax, etc.) and accommodation (hotel, if needed). Passengers were also able to ask for a re-routing or a reimbursement of their tickets. Air carriers were, however, not obliged to pay monetary compensation (up to =C600 per passenger), as the volcanic crisis indeed amounted to an extraordinary circumstance45 that could not have been avoided even if all reasonable measures had been taken. The volcanic ash crisis was an enormous financial blow to the aviation industry. Very quickly, a parallel was drawn with the economic impact of September 11, 2001, on which occasion the European Commission clarified the application of the state aid rules.46 On April 27, 2010, Commissioner Kallas stated that aid measures could take different forms (both state aid and other aid) and pointed to article 107.2.b of the Treaty on the Functioning of the European Union (“TFEU”),47 which specifically allows aid to make good the damage caused by natural disasters or exceptional occurrences.48 But the status of the Member States’ budgets makes it unlikely that airlines will effectively receive assistance. C. E.U.-U.S. OPEN SKIES: SECOND STAGE On June 24, 2010, the E.U. Transport Ministers signed the second stage of the open skies agreement between the E.U. and the United States.49 The first stage of the agreement was adopted by the E.U. in 2007 and came into effect on March 30, 2008.50 Article 21 provided that the E.U. and U.S. negotiators would meet again in May 2008 to “further the common goal of continuing to open access to markets,” resulting in: (i) a protocol to amend the air transport agreement between the United States and the E.U.; (ii) a memorandum of consultations accompanying the second stage agreement; and (iii) a joint statement on environmental cooperation.51 One of the issues that has dominated the E.U.U.S. aviation relationship is airline ownership and control: current U.S. legislation allows foreign ownership only up to twenty-five percent of voting rights, whereas the E.U. allows forty-nine percent. As a practical matter, such legislation prevents true transatlantic aviation mergers from occurring and causes air carriers from both sides of the Atlantic to join forces in the form of alliances.52 The second stage E.U.-U.S. open skies agreement now includes a provision stating that upon the necessary legislative change in the United 43. See, e.g., Memorandum from the European Comm’n on Volcanic Ash Cloud Crisis (Apr. 27, 2010). 44. Commission Regulation 261/2004, Establishing Common Rules on Compensation and Assistance to Passengers in the Event of Denied Boarding and of Cancellation or Long Delay of Flights and Repealing Regulation (EEC) No. 295/91, 2004 O.J. (L 46), 1 (EC). 45. Id. art. 5(3). 46. See, e.g., Memorandum from European Comm’n on Volcanic Ash Crisis (Apr. 20, 2010). 47. Consolidated Version of the Treaty on the Functioning of the European Union art. 107, Sep. 5, 2008, O.J. (C 115) 47. 48. See Information Note to the Commission, at 8, SEC (2010) 533 final (Apr. 27, 2010). 49. Press Release, European Comm’n, Siim Kallas Welcomes the Signature of the Second Stage EU-US “Open Skies” Agreement (June 24, 2010). 50. Air Transport Agreement art. 26, May 25, 2007, O.J. (L 134) 4. 51. Memorandum of Consultations, 2010 O.J (L 223) 3-19. 52. R. Bruce Keiner, Jr., Lorraine B. Halloway & Gerald F. Murphy, Crowell & Moring LLP, Airline Alliances, Antitrust Immunity and Mergers in the United States, Address at the Annual Meeting of the Amer- SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 320 THE INTERNATIONAL LAWYER States, the E.U. will equally and reciprocally allow majority ownership of E.U. airlines by U.S. nationals.53 Several other equally important elements of the second stage agreement are not, however, dependent on legislative changes and will enter into effect immediately. These elements include (i) mutual recognition of certain regulatory decisions; (ii) an extension of the role of the monitoring body established by the open skies agreement, the Joint Committee; (iii) access by E.U. airlines to U.S. government-financed traffic, notably the Fly America program; (iv) closer cooperation on aviation security and on environmental matters; and (v) increased transparency of the cooperation between the respective competition authorities concerning the transatlantic airline alliances. III. The Rotterdam Rules and Uniform Intermodal Cargo Law: While the World Debates, the U.S. Supreme Court Acts Maritime observers waited throughout 2010 for U.S. Senate action ratifying the Rotterdam Rules (“Rotterdam”), formally known as the United Nations (“UN”) Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea.54 As described by the International Transportation Committee in last year’s article, Rotterdam is intended to foster more uniform liability for the ocean and inland portions of global cargo movements, while facilitating e-commerce.55 Without waiting for action on Rotterdam, however, another branch of the U.S. government acted in 2010 to facilitate uniform intermodal liability for such cargo. In some respects, the U.S. Supreme Court’s decision in the “K-Line” case, formally known as Kawasaki Kisen Kaisha Ltd. v. Regal-Beloit Corp.,56 did at least as much for this cause as Rotterdam could. A. ROTTERDAM The U.S. treaty ratification process begins in the State Department, where the Legal Adviser prepares a transmittal package with input from other executive departments, including the DOT and the Department Justice in this case. This package is then reviewed by the Secretary of State and the President before its submission to the Senate. As of October 2010, the Rotterdam transmittal package was still being drafted,57 and an informed estimate is that the package will not be delivered to the Senate before March 2011.58 ican Bar Association (Sept. 2009) (transcript available at http://www.crowell.com/documents/airline-alliances-antitrust-immunity-and-mergers-in-the-us.pdf), at 1. 53. Protocol to Amend the Air Transport Agreement between the United States of America and the European Community and its Member States, signed on 25 and 30 Apr. 2007 art. 6, Aug. 25, 2010, O.J. (L 223) 78. 54. Contracts for the International Carriage of Goods Wholly or Partly by Sea, UNCITRAL, U.N. Doc. E.09.V9 (2009), available at http://www.uncitral.org/uncitral/en/uncitral_texts/transport_goods/2008rotterdam_rules. html. 55. See Mark J. Andrews et al., International Transportation Law, 44 INT’L LAW. 379, 395-97 (2010). 56. Kawasaki Kisen Kaisha Ltd. v. Regal-Beloit Corp., 130 S. Ct. 2433, 2438-49 (2010). 57. Interview with Andrews, Co-Author, Office of the Legal Adviser (Oct. 5, 2010). 58. Interview with Andrews, Co-Author, Office of the Legal Adviser (Oct. 4, 2010). VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW TRANSPORTATION LAW 321 Given the status of U.S. ratification, it is not surprising that the rest of the world is mulling the merits of Rotterdam at a deliberate pace. On one hand, the number of signatory countries has increased to twenty-three from sixteen at the September 2009 signing ceremony.59 The signatories account for perhaps twenty-five percent of global trade,60 and include major seafaring countries as well as minor players. The European Parliament has recommended that member states ratify Rotterdam.61 The convention is supported by non-governmental organizations ranging from the World Shipping Council (carriers in U.S. trades) to the National Industrial Transportation League (U.S. shippers) to the International Chamber of Commerce62 to the American Bar Association.63 On February 3, 2010, commercial representatives from fifteen Arab League states signed the Alexandria Declaration 2010, recommending that Arab League states jointly sign Rotterdam.64 On the other hand, there remain plenty of skeptics of Rotterdam outside the United States. For example, the Colloquium held from October 24-27, 2010 by the Comité Maritime International (“CMI”) in Buenos Aires, Argentina,65 devoted a full day to panels on “Rotterdam Rules–An Alternative for Maritime Carriage for South America?” CMI is closely following Rotterdam, having drafted the initial text from 1999 to 2002 when it was delivered to the United Nations Commission on International Trade Law (“UNCITRAL”), where after six more years of negotiation, Rotterdam was approved by the UN General Assembly in 2008.66 At the CMI Colloquium, the panels included many prominent lawyers who were involved in the early CMI work and subsequent UNCITRAL negotiation. The many national maritime law associations present at Buenos Aires, with particularly strong representation from Latin American countries, vigorously debated the merits of Rotterdam. Much of this debate concerned the “Declaration of Montevideo” (“Montevideo”), signed on October 22, 2010 and supported by fifty-eight individuals from eleven countries, plus three Uruguayan business associations.67 Montevideo was also signed by eight maritime lawyers who have written widely against Rotterdam, under an endorsement “applaud[ing] the excellent work done [to create] Montevideo and wholly support[ing] the 59. See Status 2008-United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea - the “Rotterdam Rules”, UNCITRAL, U.N. Doc. E.09.V9 (Dec. 11, 2008), http://www.uncitral. org/uncitral/en/uncitral_texts/transport_goods/rotterdam_status.html (last visited Dec. 1, 2010). 60. Adeline Teoh, UN Shipping Convention Ready for Australia, DYNAMIC EXPORT, Nov. 16, 2009, http:// www.dynamicexport.com.au/news/un-shipping-convention-ready-for-australia00799/. 61. Shipowner Associations Welcome EP Support for Rotterdam Rules, TRANSPORTWEEKLY, May 17, 2010, http://www.transportweekly.com/pages/en/news/articles/72043. 62. Vijay Kurup, Let’s Join Rotterdam Convoy, ECON. TIMES, June 3, 2010, http://economictimes.indiatimes. com/opinion/policy/lets-join-rotterdam-rules-convoy/articleshow/6005658.cms. 63. R.G. Edmonson, Bar Association Endorses Rotterdam Rules, J. OF COM., Feb. 9, 2010, http://www.joc. com/maritime/bar-association-endorses-rotterdam-rules. 64. Press Release, Arab Acad. for Sci., Tech. & Mar. Transport, Alexandria Declaration 2010 (Feb. 3, 2010), available at http://www.uncitral.org/pdf/english/news/ArabPressReleaseRR.pdf. 65. Co-author Schmitt attended the Rotterdam deliberations at the CMI Colloquium, and co-signed the Montevideo Declaration which criticized Rotterdam as discussed infra. 66. ROBIN BURNETT & VIVIENNE BATH, LAW OF INTERNATIONAL BUSINESS IN AUSTRALASIA 151 (2009). 67. DECLARATION OF MONTEVIDEO (2010), http://www.rotterdamrules.com/DECLARATION%20OF% 20MONTEVIDEO-%20FRINAL.pdf. SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 322 THE INTERNATIONAL LAWYER views stated therein that Rotterdam should not be brought into force.”68 An English translation of Montevideo was circulated at the CMI Colloquium,69 along with the following three critiques of Montevideo: 1. “Montevideo Declaration-The Facts” by Manuel Alba (Spain), and eight others including Francesco Berlingieri (Italy), Professor Michael Sturley (U.S.), and Alexander Von Ziegler (Switzerland);70 2. “The Rotterdam Rules, a Latin-American Response to the ‘Declaration of Montevideo’”, signed by Jose Vincente Guzman plus 14 others from Columbia, Chile, Spain, Uruguay and Venezuela;71 and 3. “Limitation of Liability in the Rotterdam Rules, a Latin American Perspective” by Alberto Cappagli (President of the Argentine Maritime Law Association).72 The main concerns about Rotterdam identified by CMI panelists included the jurisdiction/arbitration provisions, the limits of liability, the burden on claimants to prove the cause of loss, and the overall complexity of the instrument. Opponents of Rotterdam were concerned about potential uncertainty introduced by freedom of contract for “volume contracts” under Rotterdam. While even Rotterdam supporters such as Professor Sturley acknowledged imperfections of Rotterdam in some of these areas, they emphasized that it incorporated significant compromises between vessel and cargo interests and that the years of effort behind these compromises were unlikely to be replicated in the near future if Rotterdam failed. Some parts of Rotterdam are non-controversial. For example, the e-commerce provisions are generally regarded as a long overdue modernization of carriage of goods law. If Rotterdam were to stall for lack of general acceptance, many proponents hope that these necessary improvements can be adopted in some other international document without further controversy. B. K-LINE Meanwhile, back in the United States, the Supreme Court in K-Line had to address the conflicting liability rules of U.S. statutes on ocean and inland transportation by reference to the law as it is, not as it would be after Rotterdam. The Court held, in a 6-3 decision, that the ocean rules prevail, at least on containerized import shipments moving on single “through bills of lading” and delivered to inland U.S. destinations via rail.73 68. Id. 69. A link to the English language translation of the Declaration of Montevideo—as prepared by the solicitors at Pysdens (Eng.) and Dr. Julio Vidal Amodeo (Uru.), with signatories shown—may be viewed at http:// www.ahbl.ca/files/publications/Declaration_of_Montevideo.pdf. 70. Manuel Alba et al., Montevideo Declaration: The Facts, http://www.cmi2010buenosaires.com.ar/Facts% 20-%20Montevideo%20Declaration%20-%20final%20-%20English.pdf (last visited Feb. 1, 2011). 71. José Vincent Guzmán et al., The Rotterdam Rules-A Latin–American Response to the Declaration of Montevideo (2010), http://comitemaritime.org/Uploads/Rotterdam%20Rules/The%20Rotterdam%20Rules%20%20A%20Latin-American%20Response%20to%20the%20Declaration%20of%20Montevideo.pdf. 72. Alberto C. Cappagli, Limitation of Liability in the Rotterdam Rules–A Latin American Perspective (2010), http://comitemaritime.org/Uploads/Rotterdam%20Rules/Limitation%20of%20Liability%20-%20Alberto%20Cappagli.pdf. 73. See Kawasaki Kisen Kaisha Ltd. v. Regal-Beloit Corp.,130 S. Ct. 2433, 2444 (2010) [hereinafter KLine]. VOL. 45, NO. 1 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW TRANSPORTATION LAW 323 For generations before K-Line, the respective liabilities of ocean and inland carriers for cargo loss and damage differed sharply under U.S. law. With the advent of containerized cargo moving by sea and land on a through bill of lading, the differences between U.S. maritime rules (The Carriage of Goods by Sea Act or “COGSA”)74 and U.S. inland rules (collectively known for historical reasons as the Carmack Amendment)75 increasingly roiled international commerce. Carmack generally was considered a more “cargo friendly” regime than COGSA because (among other things) liability levels tended to be higher76 and the time period for bringing suit was longer.77 In 2004, the U.S. Supreme Court’s Kirby decision held that whenever intermodal cargo movements under a through bill included a substantial segment of sea transportation, they were subject to federal maritime law rather than state law.78 But both COGSA and Carmack constitute federal law, and Kirby did not decide which took precedence on inland segments. After Kirby, federal appeals courts split on this question. Notably, the appeals courts for the Second and Ninth Circuits held that Carmack prevailed, while several other circuits gave primacy to COGSA.79 As noted, the Supreme Court now has agreed with those other circuits. The K-Line decision does not directly address which body of law applies to containerized export movements on through bills, but at least two of the Court’s rationales for choosing COGSA (uniformity concerns plus the historical limitations of Carmack’s international reach)80 would seem to apply as well to exports. K-Line likewise does not directly consider import shipments being delivered by truck. The governing statute, however, gives motor carriers much more latitude to contract out of Carmack (thus eliminating the choice-of-law issue) than railroads have.81 Notably, the Rotterdam Rules would not overrule the K-Line result. Rotterdam, like COGSA, permits ocean cargo rules to be extended inland by contract,82 and K-Line simply holds that U.S. law permits such contracts. 74. See generally Carriage of Goods by Sea Act, 46 U.S.C. § 30701 (2011) [hereinafter COGSA]. 75. See generally 49 U.S.C. § 11706 (2011); 49 U.S.C. § 14706 (2011). 76. See David Fisk, COGSA v. Carmack–United States Supreme Court to Address Carmack’s Application to Intermodal Shipments, SUBROGATION AND RECOVERY L. BLOG (Mar. 5, 2010), http://www.subrogationrecoverylawblog.com/2010/03/articles/transportation/cogsa-vs-carmack-united-states-supreme-court-toaddress-carmacks-application-to-intermodal-shipments/. 77. Compare 49 U.S.C. § 11706(e) (2010) (setting a two year time limit), with 46 U.S.C. § 30701(3)(6) (2006) (setting a one year limit). 78. Norfolk S. Ry. Co. v. Kirby, 543 U.S. 14, 27 (2004). 79. Compare Regal-Beloit Corp. v. Kawasaki Kisen Kaisha Ltd., 557 F.3d 985, 992 (9th Cir. 2009) (rejecting argument that Carmack cannot apply to ocean carriers), and Sompo Japan Ins. Co. of Am. v. Union Pac. R. Co., 456 F.3d 54, 76 (2d Cir. 2006) (holding that Carmack governs), with, e.g., Altadis USA, Inc. ex rel. Fireman’s Fund Ins. Co. v. Sea Star Line, LLC, 458 F.3d 1288, 1294 (11th Cir. 2006) (concluding that in the absence of a separate bill of lading, Carmack does not apply). 80. See K-Line, 130 S. Ct. at 2446-47. 81. Compare 49 U.S.C. § 10502(e) (2011) (limiting a railroad’s ability to contract out of Carmack) with 49 U.S.C. § 14706 (2011) (containing no similar provision for motor carriers). 82. While Rotterdam does not directly address long-haul inland transportation, Professor Sturley has demonstrated that inland extensions of Rotterdam by contract are permissible by implication from its text. See Michael F. Sturley, Modernizing and Reforming U.S. Maritime Law: The Impact of the Rotterdam Rules in the United States, 44 TEX. INT’L L.J. 427, 448-50 (2009). As to extending the ocean regime inland by contract under current law, see COGSA, 46 U.S.C. § 13701(1)(3) (2011). SPRING 2011 PUBLISHED IN COOPERATION WITH SMU DEDMAN SCHOOL OF LAW THE INTERNATIONAL LAWYER A QUARTERLY PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW 324 THE INTERNATIONAL LAWYER IV. Developments in European Union Maritime Law A. LEGISLATION On September 13, 2010, the Commission adopted rules in support of E.U. Directive 2009/16/EC on Port State Control, establishing the criteria for measuring company and flag state performance, and creating a new online register to “name and shame” shipping companies that perform poorly in port state controls inspections, while giving visibility to those companies that perform well.83 Under Directive 2009/16/EC, which went into force on January 1, 2011, the E.U. hopes to establish a harmonized system of port state control and a coordinated system of port state safety inspections.84 A new THETIS database “will track all safety inspections” across the E.U. and “provide a risk analysis that will determine the frequency and priorities for inspections” carried out in the Member States.85 The Commission has created a Register of Company Performance and a Register of Flag Performance. The former will be publicly available online and
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