Hispanic Latino Team Blog

Mexico Passes New Law on Data Protection

Sheppard Mullin — Tue, 15 Jun 2010 11:20:59 -0800

By Larissa Calva-Ruiz

Mexico's Federal Law for the Protection of Personal data (la Ley Federal de Protección de Datos Personales en Posesión de los Particulares) (the "Law") protects an individual's personal data by restricting its use and prescribing the way in which both private and public entities must treat the collection, use, and disclosure of personal data relating to Mexican citizens. The owner of the information has the right to decide who can access his/her personal data and in which ways it might be disclosed to others. The owner has the right to correct such information, control the transfer of the information and block or cancel its use. Also, the owner of the information has the right to access his own information regardless of the holder.

Personal data is defined as data which affects the intimate sphere of its owner and whose inappropriate use may result in discrimination or may bring about a great risk to its owner. "Sensitive data" is information that may reveal aspects such as:

Racial or ethnic origin
Present or future health status
Genetic information
Religious belief
Philosophical and moral beliefs
Union affiliation
Political views
Sexual Preference

Any type of use of sensitive data must be expressly authorized by its owner through a privacy notice. Authorization to use other types of personal data may be express or implied. Any inappropriate use of sensitive or personal data is penalized with economic sanctions; for crimes related to the inappropriate use of personal or sensitive data, the sanctions can go up to 10 years of prison. The organization in charge of enforcing the Law is the Instituto Federal de Acceso a la Información, IFAI (Federal Institute for Access to Public Information).

As for cross border transfer of data, personal data may be transferred nationally or internationally without authorization of the owner: (i) when the transfer is made to parent companies, subsidiaries or affiliates under the control of the party responsible for the data or to a parent company or any other company within the same corporate group of the responsible party that uses the same procedures and internal policies; (ii) when the transfer is provided for in a treaty that Mexico is a part of; (iii) when the transfer is necessary to prevent disease or for medical diagnosis, medical care, or medical treatment; or (iv) when the transfer is necessary by virtue of an agreement executed or pending execution by the owner of the data, the party responsible for the use of the data and a third party, among other reasons provided for in the Law.

On April 27, 2010, the new law on data protection was passed by the Mexican Senate, clearing the way for the President to sign the landmark legislation, which provides for penalties up to an astounding $1.5 million for violations under the law. The Law's purpose is to place Mexico in the same level of protection of personal data as the countries that are members of the OECD, APEC and the European Union and complies with the standards approved in the 31st International Conference of Data Protection and Privacy of 2009. As soon as the President signs it and the Law is published in the Federal Official Gazette, it will have full force and effect.

For further information, please contact Larissa Calva-Ruiz at (714) 424-2833.

Second Circuit Rejects $2 Billion Class Action Award Against The Republic of Argentina

Sheppard Mullin — Tue, 08 Jun 2010 13:04:20 -0800

By Daniel L. Brown & Giselle Rivers

On May 27, 2010, the Court of Appeals for the Second Circuit affirmed in part and remanded in part a district court's decision certifying class actions against the Republic of Argentina and granting over $2 billion in damages to eight classes of plaintiffs. Puricelli v. The Republic of Argentina, No. 09-0332, 2010 WL 2105132 (2nd Cir. May 27, 2010)("Puricelli"). While the Court of Appeals concluded that class certification was appropriate, it held that the district court erred in entering aggregate class-wide relief, as opposed to determining individual relief.

Eight separate putative class actions were filed in the district court by holders of defaulted Argentine bonds, asserting their right to repaymentagainst the Republic of Argentina. The district court certified eight classes of plaintiffs who purchased bonds prior to the date the class actions were filed and who held them continuously until the time of final judgment. Members of the classes differed because they purchased their bonds at different times, some purchased directly from Argentina while others bought their bonds in the secondary market, and some accelerated their bonds while others did not. In January, 2009, the district court granted summary judgment to the plaintiffs and entered judgments totaling over $2 billion in damages to the eight classes, based on aggregate damages derived from "reasonable estimates" of the total amounts of damages the classes might recover.

The Republic of Argentina appealed, arguing that, in certifying the classes, the district court had misapplied Rule 23 of the Federal Rules of Civil Procedure, and erroneously granted aggregate relief based on estimates, as opposed to individual damage determinations.

The Court of Appeals first considered the Republic of Argentina's argument that class action resolution was appropriate because plaintiffs failed to satisfy Rule 23(b)(3)’s requirements of adequacy of representation, predominance, and superiority. The Court of Appeals rejected each of these claims. First, the court found that while there was a possible conflict of interest because the lead counsel represented all eight classes, as well as individual plaintiffs in non-class actions, these possible conflicts threatened the damage allocation stage of the proceeding, not the liability phase. Second, the Court of Appeals determined that "the hunt for assets capable of satisfying Argentina’s obligations to the plaintiffs" satisfied the requirement that a common question of law or fact predominate, and predominance was not negated by the defendant’s concession of liability. Finally, the Court of Appeals concluded that a class action was a superior means of adjudicating the controversy because proceeding individually would be prohibitive for members of the class with small claims.

Next, the Court of Appeals addressed defendant’s argument that the district court's grant of aggregate class-wide judgments was improper because it was based on global estimates of Argentina’s liability derived from expert opinion, and not on individualized proof. The Court of Appeals also noted that the district court acknowledged that the estimates were likely inflated, but had justified the award based on the fact that recovery was unlikely due to the improbability of ever reaching Argentina's assets.

The Court of Appeals held that such estimates violated the Rules Enabling Act, 28 U.S.C. § 2072(b), which forbids the use of federal rules of procedure to “abridge, enlarge or modify any substantive right." Specifically, the Court of Appeals stated that an award based on estimates allowed the plaintiffs to encumber property to which they had no colorable claim. As a result, the court vacated the district court's damage awards, concluding that the award was inappropriate because it did not even roughly reflect the aggregate amount owed to class members, and remanded for more accurate damages to be determined.

For further information, please contact Daniel L. Brown at (212) 634-3095.

Aerospace Opportunities in Mexico

Sheppard Mullin — Fri, 14 May 2010 10:38:18 -0800

By Jerry Gumpel & Larissa Calva-Ruiz

A few years ago, the Mexican government set its sights expanding it manufacturing capabilities in the aerospace industry. The preliminary results from this effort are in and the Mexican story is a story of success. Due to government's efforts, Mexico has become an "emerging cluster" with more than 190 aerospace companies employing more than 20,000 workers and exported goods in excess $3,400,000,000 in 2008.[1] Indeed, in a survey of major manufacturing investments in the aerospace industry from 1990-2009 conducted by AeroStrategy Mexico emerged as the country with the most manufacturing investments of any country. (Exhibit 1). This article will explore some of the reasons why "setting up shop" in Mexico is so attractive.

Geographical Location

The most obvious competitive advantage that Mexico offers is the close proximity to the United States and Canada. Most of Mexico is on the Central Time Zone and this facilitates communications between a U.S. company and its Mexican plant. NAFTA provides even more advantages, as many of the import/export duties were significantly lowered or eliminated by this trade agreement. In addition to that, Mexico has one of the world's largest free trade agreements network.

Low Manufacturing Costs and Skilled Labor Force

Mexico currently provides one of the most price competitive labor forces in the world[2]. This labor force is highly skilled as a result of Mexico’s experience in the auto and consumer electronic industries. In addition, Mexico has increased funding of university programs focused on the training of engineers and technicians in the aerospace field. The Ministry of Economy and the National Council on Science and Technology (Consejo Nacional de Ciencia y Tecnología, CONACYT) have developed various programs in the education sector in order to assist in the education of aerospace engineers. As a result, many universities throughout Mexico (Instituto Tecnológico y de Estudios Superiores de Monterrey, Instituto Politécnico Nacional, Universidad Autónoma de Chihuahua and Universidad Autónoma de Nuevo León, for example) have now included specialized aeronautics degrees in their curricula. The State of Querétaro has gone as far as to open a university specifically dedicated to the aeronautic industry- the Universidad Nacional Aeronáutica de Querétaro. Between 12,000 and 14,000 engineers graduate each year from Mexican universities; the vast majority of them speak English as a second language.

Bilateral Aviation Safety Agreement

A Bilateral Aviation Safety Agreement (BASA) was signed by Mexico and the United States on September 18, 2007. The BASA allows Mexico to manufacture, certify and then ship directly from its factories in Mexico to the US without the burden of additional inspections or certification in the US. Mexico, through the Mexican General Directorate of Civil Aeronautics (Dirección General de Aeronáutica Civil, DGAC), and the United States, through the Federal Aviation Administration (FAA), work together to ensure that every product or component manufactured in Mexico complies with applicable standards of safety.

Protection of Intellectual Property

Unlike other emerging countries, Mexico has shown a commitment to protecting intellectual property rights. Indeed, both through its internal laws and the many treaties it has signed, Mexico has developed the proper legal infrastructure to assure foreign investors that it takes intellectual property rights seriously. Mexico is a party to the following international treaties:

World Intellectual Property Organization
Paris Convention for the Protection of Industrial Property
Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks
Lisbon Agreement for the Protection of Appellations of Origin and their International Registration
Patent Cooperation Treaty
Singapore Treaty on the Law of Trademarks
Trademark Law Treaty
Vienna Agreement Establishing an International Classification of the Figurative Elements of Marks
Strasbourg Agreement Concerning the International Patent Classification
Locarno Agreement Establishing an International Classification for Industrial Designs

Internally, the Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial, IMPI) is charged with enforcing all industrial and intellectual/industrial property laws in Mexico. The IMPI is an effective enforcer of SP Rights.

Governmental Incentives

Mexico's government on both the federal and local level have played a key role in the development of the local aeronautics industry. The federal government continues to provide incentives and as much help as possible by allocating to the industry a significant part of funds through its National Exterior Commerce Bank (Banco Nacional de Comercio Exterior, BANCOMEXT). Incentive programs are developed on a case-by-case basis, and are negotiated with federal, state and municipal governments. At the federal level, in addition to the ability to import raw materials without paying duties under the Immex program a foreign investor may receive grants for research and development or to train its future workforce. State incentives can include a temporary exemption from payroll tax, subsidized real estate facilities, reduction of certain fees (i.e., water connection fees), and funding for workforce training. Lastly, municipalities can grant an exemption from property taxes and reduced fees for local permits.

Legal Structures

As often is the case in other emerging countries, investments in Mexico are either through joint ventures or wholly owned subsidiaries. While maintenance repairing overhaul facilities ("ROM") can easily be set up as joint ventures, original equipment manufacturers ("OEM") most frequently are wholly owned subsidiaries, particularly for defense contractors who must deal with ITAR considerations. There are no restrictions on foreign ownership of an ROM or OEM. In regard to joint ventures, Mexico has developed different legal vehicles that provide a foreign investor with safeguards with respect to company governance similar to what they would have if they were partnering with a company in the United States. Most importantly, the combination of the US-Mexico tax treaty and the availability of tax transparent entities create opportunities for tax efficient structures for either type of structure.

For further information, please contact Jerry Gumpel at (858) 720-8965 and Larissa Calva-Ruiz at (714) 424-2833.

[1]Source, Aerostrategy; CNN Expansion

[2]A study done by KPMG in 2008 mentioned that companies established in Mexico can save up to 30% in operating costs.

Increased Opportunities for Foreign Investment in Brazil Also Bring Increased Risk for FCPA Violations

Sheppard Mullin — Thu, 25 Mar 2010 04:32:29 -0800

By Curt Dombek and Karin Johnson

With the award to Rio de Janeiro of two of the highest profile sports events in the world—the 2014 World Cup and the 2016 Summer Olympics—many U.S. and multinational corporations will be looking for investment opportunities in Brazil. If the 2008 Olympics in China are to be any kind of guide, foreign investment in Brazil will dramatically increase over the next several years and Brazil will become an increasingly attractive market. Companies looking to do business or invest in Brazil, however, should also be aware of the risks they face under the Foreign Corrupt Practices Act (“FCPA”) and should ensure that they have a strong compliance program in place.

The FCPA is a federal law that prohibits offering, promising, or giving anything of value—as well as authorizing such an offer, promise, or gift—to a foreign official for the purpose of obtaining, retaining, or directing business to a person or entity. The FCPA has a very broad reach in comparison to many other U.S. laws. U.S. corporations can be liable for conduct that occurs entirely outside the United States and multinational corporations can be liable for conduct that bears only a tenuous connection to the United States, such as where a corrupt payment is routed through a U.S. bank account or an employee in the United States receives an email regarding a corrupt transaction.

Companies and individuals who violate the FCPA can face devastating consequences. In 2008, Siemens AG paid a record high fine totaling $800 million to settle charges with the DOJ and SEC. Individuals accused of FCPA violations can face jail time as well as high fines. Even being under investigation for alleged FCPA violations can tarnish the reputation of a company or individual and have long-lasting effects on a company’s business and on an individual’s career.

Any company doing business in Brazil faces an elevated risk of running afoul of the FCPA. In 2009, Brazil received a score of 3.7 on Transparency International’s Corruption Perceptions Index—signaling a serious corruption problem. Brazil is also clearly on the radar of U.S. law enforcement. Several recent, high-profile investigations under the FCPA have involved bribes paid to Brazilian officials. Furthermore, because of the board array of public officials in Brazil, many business interactions may be fraught with risk. In Brazil, anyone who carries out a public function, job, or office, even on a temporary basis or without compensation, is considered a public employee. This includes doctors in public hospitals, professors at public universities, anyone performing outsourced government jobs, as well as officials of state-owned companies. In fact, one recent FCPA case involved payments made to officials of Petrobras, Brazil’s state-owned oil company.

While there are risks associated with doing business in Brazil, this by no means should discourage companies from seeking out business opportunities in Brazil. A company interested in doing business in Brazil simply needs to be proactive regarding compliance with the FCPA and be alert to red flags that would require investigation. Implementing a strong compliance program can help prevent violations of the FCPA from occurring and is likely to reduce potential fines and penalties, particularly if the compliance program is initiated before beginning operations in a moderate or high risk country.

The first step in establishing a compliance program is drafting and disseminating a strong Code of Conduct that prohibits employees from engaging in illegal and unethical behavior. In addition, a robust employee training program should be established to educate employees on the FCPA, as well as any other relevant laws. To follow up on the training element of the compliance program, companies should have their employees sign periodic certifications that they are aware of and have complied with company policies and all relevant laws. In addition, new employees should be required to pass background checks prior to being hired by the company.

The next step is establishing the proper mechanisms to deal with actual or suspected violations. This includes setting up a hotline or some other kind of confidential reporting mechanism that enables employees to report conduct they feel violates company policies or the law, as well as establishing protocols for investigating any reports of improper conduct. Employees who are found to have engaged in conduct that violates company policies or the law must be disciplined.

A proper compliance program will also address third party service providers. Companies face significant exposure when using third parties, especially because under the FCPA “knowledge” of corrupt payments can be established on the basis of conscious avoidance. This means that an individual could be held liable where he or she was aware there was a high probability a corrupt payment was being offered or made but consciously avoided confirming whether or not that was the case. Because of the risk inherent in working with third parties, it is important to create comprehensive protocols for establishing, continuing, and terminating the business relationship. As with employees, companies should ensure that they thoroughly vet third party service providers prior to beginning the relationship. Furthermore, when negotiating agreements with third parties, companies should protect themselves by including provisions that, among other things, provide for audit rights and termination at will. Once the relationship has begun, companies should provide training as appropriate on the FCPA and other laws to the appropriate employees of the third party. Companies should also investigate all red flags, such as extra-contractual payments or other unusual expenditures that are incurred through a third party and should obtain periodic certifications of compliance with U.S. and local laws.

U.S. and multinational corporations should not shy away from doing business in countries such as Brazil. Rather, they should ensure that they have protected themselves from liability to the greatest extent possible by instituting a strong compliance program as early as possible.

For further information, please contact Curtis Dombek at (213) 617-5595 and Karin Johnson at (202) 218-0008.

Mexico's President Felipe Calderon Announces New Incentives for the Movie Industry at a Special Ceremony Held at Baja Studios in Rosarito

Sheppard Mullin — Wed, 10 Mar 2010 10:16:42 -0800

By Jerry Gumpel

In February, Mexico's President Felipe Calderon approved a decree establishing new incentives for the film industry in Mexico. Mr. Calderon announced the incentives at a special ceremony held March 9, 2010 at Baja Studios in Rosarito, Mexico (www.bajastudios.com), where major motion pictures like Titanic and Master and Commander were filmed. (Readers should note that Baja Studios is a client of Sheppard Mullin.) The highlight of the new incentive program is a proposed refund of up to 7.5% of amounts spent by filmmakers in Mexico for movie productions with expenditure of at least $70,000,000.00 Pesos. When added to available state incentives and the refund of value added tax upon "export" of a movie, the total value of an incentive package could be approximately 28% of the amount spent in Mexico for production (Note: state incentives vary on a state by state basis.). In addition, President Calderon announced that ProMexico (the government's agency in charge of promoting foreign investment) would be charged with responsibility to provide special assistance to the movie industry to expedite the paper work involved in the production of movies in Mexico. This assistance would include expediting the import of goods and the prompt processing of the refunds under the incentive program. The President stated that the new incentives should serve to put Mexico back on the map of the world of film. Mexico hopes to use its proximity to Hollywood, relatively low labor costs, and new tax incentives to lure major productions back to the country.

For further information, please contact Jerry Gumpel at (858) 720-8965.

U.S. Treasury Department Signs New Treaty with Chile

Sheppard Mullin — Fri, 26 Feb 2010 07:52:08 -0800

By Keith Gercken and Dawn Mayer

On February 4, 2010, the Department of Treasury signed a new income tax treaty with Chile, signifying a milestone for both countries. The treaty has not yet been ratified, but if approved by the U.S. Senate, would become the first income tax treaty between the U.S. and Chile and only the second U.S. income tax treaty with a South American country (a treaty with Venezuela was signed in 1999).

The proposed U.S.-Chile treaty would provide some certainty and stability for U.S. and Chilean cross-border investors and would provide for reduced withholding rates on cross-border payments of dividends, interest and royalties. The current rate is generally 30% on the gross amount of U.S.-source payments under applicable U.S. domestic law.

The maximum withholding rate on dividends would generally be 15%, reduced to 5% where the beneficial owner of the dividend is a company that holds directly at least 10% of the voting power of the company paying the dividend. Further, dividends paid to pension funds would be exempt from withholding tax.

Interest payments would be subject to a maximum withholding tax of 4% if the payment is made to certain financial institutions or insurance companies; or to enterprises selling machinery or equipment if the interest is paid in connection with the sale on credit of such machinery or equipment. In all other cases, the maximum withholding rate would be 15% for a period of five years from the date the interest withholding provisions take effect, dropping to 10% after that.

Royalty payments would be subject to a maximum withholding tax of 2%, if payments are made for the use, or right to use, industrial, commercial, or scientific equipment (other than ships, aircraft or containers). A maximum withholding rate of 10% would apply to payments for the use of, or right to use, any copyright, patent, or other intangible property.

The new tax treaty contains other significant provisions, including rules to determine when an individual or enterprise of one country is subject to tax on business activities in the other country and rules to enhance the mobility of labor by coordinating the tax aspects of the U.S. and Chilean pension systems. Notably, the treaty's permanent establishment ("PE") article includes a "services PE" provision under which a PE will be deemed to arise if an enterprise performs services in the other country for a period exceeding 183 days in the aggregate. As a matter of policy, the U.S. has generally opposed services PE provisions, but has made exceptions for some treaties.

If ratified, the treaty's withholding provisions would take effect for amounts paid or credited on or after the first day of the second month following the date on which the treaty enters into force. All other provisions would take effect in January following the date on which the treaty enters into force.

Companies and individuals resident in the U.S. or Chile who hold investments or conduct operations in the other country may want to reconsider their particular tax planning in light of the provisions contained in this new treaty.

For further information, please contact Keith Gercken at (415) 774 -3207 or Dawn Mayer at (415) 774-2941.

IRS Enforcement of Foreign Bank Account Reporting Rules May Catch Non-U.S. Persons by Surprise

Sheppard Mullin — Wed, 10 Feb 2010 16:58:54 -0800

By Keith Gercken

U.S. persons are generally required to file an annual information statement with the U.S. Internal Revenue Service (IRS) disclosing any beneficial interest in, or signatory authority over, bank or other financial accounts located outside the U.S. This information statement is filed on Form TD F 90-22.1, and is generally referred to as an "FBAR" (Foreign Bank Account Report").

Due to increasing concerns regarding the potential evasion of U.S. income tax that is facilitated by hiding funds in offshore accounts, the IRS has been increasingly focused on FBAR reporting over the last several years and has aggressively pursued U.S. taxpayers who have failed to properly file these reports. The IRS' most visible recent efforts in this area involved the filing of criminal charges in the U.S. against the Swiss bank UBS and certain of its employees, which actions ultimately resulted in UBS' agreement to turn over to the IRS certain information relating to accounts maintained by U.S. customers in Switzerland.

From an accountholder perspective the failure to file FBARs as required can potentially lead to severe penalties – including monetary penalties of up to 50 percent of the account balance (per year) and criminal penalties if the failure to file was willful. A recent IRS settlement initiative, which has recently expired, provided noncompliant taxpayers with the ability to voluntarily disclose unreported foreign accounts in exchange for limited – but still significant – penalties. It remains to be seen how the IRS will treat voluntary disclosures in this area following the end of the formal settlement program, but it is anticipated that voluntary disclosure would still likely result in much lower penalty exposure than would result if the IRS were to discover the failure to report itself (e.g., as a result of an offshore bank turning over customer information).

The FBAR reporting requirement is a potential trap for non-U.S. citizens that may not consider themselves to be "U.S. persons" in any meaningful respect. The basic FBAR filing requirement is imposed by § 5314 of Title 31 of the U.S. Code, and extends to "a resident or citizen of the United States, or a person in, and doing business in, the United States." While a person’s status as a U.S. citizen should be clear, the exact parameters of other two triggers are less so. For example, is a nonresident that travels to the U.S. for 30 days a year to visit customers considered to be "a person in, and doing business in, the United States"? What about a foreign national that holds a "green card" (i.e., has been granted permanent resident status for immigration law purposes), but is nevertheless not considered to be a U.S. tax resident due to the application of a "tie breaker" rule in an applicable tax treaty – is that person considered to be a "U.S. resident" required to file an FBAR?

Unlike the definition of “U.S. citizen,” the definition of a “U.S. resident” for purposes of the FBAR
filing requirement does not appear to be completely clear. Probably due to the fact that this area is administered by the IRS, it is commonly assumed that U.S. residence will be interpreted for this purpose in accordance with a person's U.S. income tax filing status. This may not necessarily be the case, however, since there is no compelling reason to conclude that the rules regarding tax residency for income tax purposes under the Internal Revenue Code (Title 26 of the U.S. Code) would necessarily control for purposes interpreting the FBAR filing requirement in Title 31 of the U.S. Code – indeed, it is possible that a foreign national’s U.S. resident status under applicable immigration or estate and gift tax rules could influence the determination of U.S. residence for purposes of the FBAR filing requirement.

Finally, while the definition of a “U.S. resident” in this context may be somewhat fuzzy in this context, the circumstances under which a foreign person may be considered to be “a person in, and doing business in, the United States” is even less clear. Perhaps recognizing the need to develop more concrete guidelines in this area, though, the IRS has announced that – for the moment at least – it will not require a nonresident alien to file an FBAR solely due to his or her status as "a person in, and doing business in, the United States."

In light of the potential uncertainties regarding the scope of the FBAR filing requirements under certain fairly common fact patterns, as well as the potentially draconian penalties that can be imposed as a result of failure to file, foreign nationals that have any substantial presence in or connection to the U.S. may wish to seek advice relating to any potential FBAR filing obligation they may have.

For more information, please contact Keith Gercken. Mr. Gercken is a partner in and Practice Leader of the Tax, Employee Benefits, Trusts & Estates group, and is located in the firm's San Francisco office.

What Every Company Should Know about Multi-Jurisdictional Cartel Investigations: Compliance Training

Sheppard Mullin — Thu, 31 Dec 2009 06:47:36 -0800

By Donald Klawiter and Jennifer Driscoll-Chippendale

This article is the first in a three-part series on multi-jurisdictional cartel investigations.

In a break from traditional enforcement trends, two recent events underscore the importance of antitrust compliance training for companies located or doing business in Mexico and Latin America. First, in November 2008, the European Commission announced that several cement companies, including Cemex, a global building materials company headquartered in Mexico, were under investigation for violating Article 81 of the EC Treaty, which prohibits cartel behavior. In May 2009, Mexico’s Federal Competition Commission joined the probe, wreaking further havoc on Cemex’s precarious financial position. Second, in February 2009, the Brazilian Ministry of Justice, in conjunction with the U.S. Department of Justice and the European Commission, took the lead in an antitrust investigation of compressor makers, including Empresa Brasileria de Compressores S.A.-Embraco and Tecumseh do Brasil Ltda. The scope of the Brazilian inquiry was unprecedented, with nearly 60 federal police agents, Justice ministry officials and state prosecutors working to serve six search warrants in Sao Paolo and Santa Catarina and gather evidence of wrongdoing.

The penalty for cartel violations across jurisdictions is steep. In the United States, the maximum fine under the Sherman Act for a corporation found guilty of cartel conduct is $100 million. Alternatively, fines in excess of the statutory maximum are twice the gain derived by or twice the loss caused by cartel. Individuals are also subject to criminal prosecution and face a maximum individual fine of $1 million and jail term of 10 years. Although the Division has previously imposed lesser sentences on non-US citiznes, this trend is changing—particularly if the individual engages in collusive activity on U.S. soil. Brazil imposes an administrative fine ranging from 1% to 30% of the gross domestic revenue of the company in the last financial year and culpable individuals must pay a fine equal to 10% to 50% of the corporate penalty. In Mexico, the Federal Competition Commission can collect fines up to 375,000 minimum daily wages for Mexico City (“MDW”) (approximately $1,740,000 USD) or 10% of annual sales from corporations and 7,500 MDW (approximately $34,800 USD) or 10% of assets from individuals. These staggering penalties far outweigh the cost of a successful compliance program, which may stop cartel activity before it takes root. Set forth below are principles of effective training gleaned from our vast experience in dealing with corporations and individuals.

1.         Focus Intensively on Senior Management

The primary actors in international cartels typically are the top executives at the corporations—the CEOs and heads of sales—who have responsibility for global operations. Accordingly, the nature of compliance training should shift from general and more basic training of the sales organization to a more sophisticated and nuanced training “seminar” for senior executives. Most compliance programs simply announce that hard-core violations such as cartel activity will not be tolerated, but effective training must candidly examine the “gray areas” of antitrust law—i.e., discussions with competitors and other conduct that appears to be less blatant than price-fixing—that are likely to crop up in commercial dealings. Ideally this dialogue should occur in an atmosphere that encourages reflection and openness, free from the judgment of their immediate superiors.

2.         Explain the Language of Antitrust Law

In cartel cases, victory or defeat often hinges on the words that an executive uses to communicate with competitors, customers and colleagues—as interpreted by the enforcers. Because a few words or even the absence of words can be characterized as an agreement, and thus a violation of law, executives need specific training on how someone can spin their words or their silence to launch an antitrust investigation. While boastful comments about aggressive business practices or hostility to customers are obviously verboten, references to “following prices,” “cooperating,” “harmonizing” or "organizing" also may suggest collusion, even where none exists. This sensitivity to language applies especially to electronic media such as email and texts, which seem harmless and ephemeral until the enforcers demand their production.

3.         Confront the Complexities of International Enforcement

The truly comprehensive seminar must also teach executives about the reality of concurrent, cross-border enforcement today, emphasizing the differences across competition law regimes and their leniency programs—and what to do if the worst happens and an investigation is initiated. Simulating dawn raids as well as drop-by interviews by enforcers—e.g., questioning at their home or as they travel—is a must. Because the prison sentences and fines for obstructing justice often exceed those imposed for antitrust violations, training should also impart that the destruction or alteration of any document relevant to an investigation is absolutely prohibited. Finally, senior executives should be educated that their suppliers could well be fixing prices or manipulating the market on products sold to their company. A state-of-the-art compliance seminar will teach the executives how to protect the company and its shareholders—and recover appropriate damages if the company is a victim of an antitrust conspiracy.

4.         Tie the Executive’s Conduct to Consequences

Despite the company’s best efforts, some executives will deny the seriousness of cartel activity unless their own self-interest is at stake. Accordingly, the company must leave no doubt that serious penalties, including but not limited to immediate termination and forfeiture of corporate benefits such as stock options and retirement, will befall those employees who engage in cartel activity. These consequences must be set forth in corporate handbooks, added to the employment contracts of senior executives and stated forcefully in compliance training so that the repercussions are clear and immediate to those at risk.

For more information, please contact Donald Klawiter or Jennifer Driscoll-Chippendale. Mr. Klawiter and Ms. Driscoll-Chippendale are partners in the Antitrust Practice Group in the firm's Washington, D.C. office.

Procurement Opportunities for U.S. Companies: Mexico's National Infrastructure Program

Sheppard Mullin — Tue, 29 Dec 2009 10:54:36 -0800

By Bram Hanono

In July 2007, President Felipe Calderon launched the National Infrastructure Program ("NIP") to increase coverage, quality, and competitiveness of Mexico's infrastructure. Through infrastructure investment, Mexico is seeking to advance its regional and global standing. The NIP, slated for 2007 through 2012, calls for approximately US$230 billion, comprised of federal and private investment, to finance 480 infrastructure projects. About half way through its duration, there are still ample procurement opportunities for U.S. Companies.

According to President Calderon, investing in infrastructure is the way to economic, social, and human development. The goal of the NIP is to bring Mexico to the top 20 percent of the World Economic Forum's Infrastructure Competitiveness Index by 2030. In 2007, Mexico ranked 64th out of 125 countries (it now ranks 69th). At the outset, President Calderon's goal was to bring Mexico's competitiveness on par with countries such as Korea, Spain, and Malaysia over the next 20 years. Mexico is on a long term strategy to not only increase its global competitiveness, but to promote balanced domestic development aimed at increasing access to public services and generating jobs.

The NIP identifies infrastructure projects in multiple sectors, such as energy, environmental, transportation, telecommunications, security, and tourism. The largest sector is the energy sector, which is poised to receive approximately 47 percent of all investment with goals of achieving oil production of at least 2.5 million barrels per day and maintaining production of natural gas at around 5 billion cubic feet per day. The NIP identifies 17,598 kilometers of new highways and rural roads to be constructed and 1,418 kilometers of railroad.   The NIP calls for five new ports and 3 new airports, along with the additional modernization of 22 ports and 31 airports. Major investment in the telecommunications sector is aimed at increasing mobile line coverage as well as internet usage and significant investment in water supply and sanitation will increase drinking water to 92 percent and sewerage to 88 percent. The infrastructure projects outlined in the NIP represent contractor, subcontractor and supplier opportunities for U.S. companies. Through the end of 2009, about US$94 billion will be invested in the NIP so far.

On November 19, 2009, top Mexican officials convened at the Mexico Infrastructure Conference: Portfolio of Infrastructure Projects for 2010, sponsored by the U.S.-Mexico Chamber of Commerce and Banobras, the Mexican National Development Bank. The unprecedented conference was held in New York and was Mexico's plea to the private sector to join an accelerated effort to develop infrastructure projects in the remaining years of the NIP and President Calderon's term in office. Mexico's Ministers and Federal Agencies' CEOs gathered for the first time to describe recent policy, legal, and monetary changes that have been implemented to make the projects more attractive to potential investors. Multimillion dollar infrastructure projects which have not been launched were also presented and discussed.

In order to accelerate the infrastructure agenda, which was slowed down during the economic recession, the Mexican government has instituted a number of new regulatory changes. First, a new law on public private partnerships has been presented to the Mexican Congress in order to achieve a 15 percent reduction in construction costs. Savings are to be achieved by speeding up the preparation of projects and increasing certainty to investors. Additionally, the 2008 Energy Reform gave PEMEX (Mexico's state-owned petroleum company) a more flexible legal framework that allows it to operate more as a company and to conduct business with third parties. Lastly, recent adjustments to the legal framework around AFORES (private pension fund operators) will allow US$6 billion for new investments.

NIP investment will continue throughout 2010. Forty-six new infrastructure projects with private sector participation will be launched, totaling US$11.3 billion. SCT (Mexico's Ministry of Transportation and Communications) will commence projects in 2010 including construction of 2,535 kilometers of new highways and bypasses, the Port of Veracruz expansion, and construction of the Riviera Maya Airport. CONAGUA (the National Water Commission of Mexico) has plans to initiate several projects in 2010. Projects include the "El Zapotillo" and "Falcon Matamoros" aqueduct projects, and a desalination plant in Ensenada, Baja California is scheduled to launch in early 2010 with a price tag of US$27 million. The CEF (Federal Electricity Commission) also has projects which it plans to tender in early 2010, including a Cogeneration plant in Salamanca and a Combined Cycle Power Plant in Valle de Mexico. PEMEX has allocated billions of dollars for infrastructure projects in 2010 which include projects such as pipeline maintenance, well drilling, pipeline extensions, building 35 new facilities, and refinery maintenance.

The NIP is an unique opportunity for U.S. companies to procure work in Mexico at a time when demand for work in the U.S. is suppressed. The NIP calls for large funding by the Mexican government to continue, as well as efforts to increase private investment. Endorsement of NIP projects by the Mexican government should ensure that NIP projects continue to be well funded and sound opportunities.

If you are interested in identifying and securing infrastructure opportunities, the U.S. Commercial Service – Mexico, part of the U.S. Department of Commerce, can provide information upon request as well as commercial assessment to support business plans in Mexico. To visit the U.S. Commercial Service – Mexico click here.   Sheppard Mullin has considerable experience representing owners, contractors, subcontractors, and design professionals with infrastructure projects worldwide including Panama, the Bahamas and Brazil in Latin America. For advise concerning development projects, please contact Miriam Montesinos at mmontesinos@sheppardmullin.com.

Key United States Laws Regarding Mergers and Acquisitions

Sheppard Mullin — Mon, 14 Dec 2009 07:08:37 -0800

By Robert Magielnicki

There are three laws which a foreign company contemplating an acquisition of a United States corporation or other business should be familiar with because they can have a significant impact upon the proposed acquisition. These statutes are:

(1)   Section 7 of the Clayton Act;

(2)   The Hart-Scott-Rodino Antitrust Improvements Act of 1976, and

(3)   The Exon-Florio Amendment to the Defense Production Act of 1950.

This article will provide an overview of each of these key statutes.

1. Section 7 of the Clayton Act

Section 7 of the Clayton Act (15 United States Code (“U.S.C.”) §18) is the key substantive U.S. antitrust law governing mergers and acquisitions. It provides that no person shall acquire, directly or indirectly, the whole or any part of the stock or other share capital or assets of another person “where in any line of commerce . . . in any section of the country, the effect of such acquisition may be substantially to lessen competition or tend to create a monopoly.”

Section 7 applies to a broad range of acquisitions, including:

Mergers and consolidations;
The formation of joint ventures;
The creation of non-corporate entities, such as, limited liability companies;
The acquisition of certain types of exclusive licenses to intellectual property rights; and
The acquisition of the securities of a non-U.S. company or of non-U.S. assets, if the company has or the assets generate substantial sales in the U.S.

There are two U.S. Government antitrust enforcement agencies: the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) and the Federal Trade Commission (the “FTC”). The enforcement position of these agencies is that Section 7 prohibits acquisitions that create or enhance market power.[1] The Enforcement Agencies define market power as the ability to maintain prices above competitive levels.

In evaluating an acquisition under Section 7, the Enforcement Agencies will initially examine the level of concentration in the relevant market or markets affected by the acquisition, as evidenced by the market shares of the competing firms. Then, they will evaluate the increase in concentration in the relevant market that will result from the acquisition.

A critical, perhaps the most critical, factor in evaluating an acquisition under Section 7, is the definition of the relevant market. It is only in the context of a relevant market that the likely competitive effects of an acquisition can be evaluated. Under Section 7, a relevant market has two aspects, a product market and a geographic market.

A product market consists of those products which customers view as reasonable substitutes for one another and to which they would turn in the event of a price increase in the products of the merging firms. The geographic market is the geographic area in which customers can look for substitute products in the event of a price increase in the products of the merging firms. The relevant geographic market can be as small as a city or as large as the world, depending upon the characteristics of the products involved.

After defining the relevant market or markets that will be affected by the acquisition, the Enforcement Agency will attempt to determine whether the acquisition will result in an unacceptable increase in concentration in any relevant market. If the Enforcement Agency decides that the acquisition raises anticompetitive concerns, it will evaluate whether market conditions are changing, ease of entry into the market, or whether there are any efficiencies that will result from the transaction that will benefit consumers (such as, cost reductions).

If the Enforcement Agency concludes that the acquisition will be anticompetitive, it usually will seek a court order preventing the consummation of the transaction. If the transaction already has closed, it will seek a court order requiring the divestiture of the acquired business (that is, undoing the transaction).

2. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”)

The HSR Act (15 U.S.C. §18A) is not a substantive antitrust law. Rather, it is a procedural “report and wait” statute that, for certain categories of acquisitions, requires (i) pre-acquisition reporting to the Enforcement Agencies, and (ii) observance of a waiting period before the transaction can close. The purpose of the HSR Act is to provide the Enforcement Agencies with advance notice and information about certain categories of acquisitions and the opportunity to evaluate them under substantive antitrust law (e.g., Section 7 of the Clayton Act) before the transaction closes.

In order to be reportable, an acquisition must meet two tests: (1) a Size-Of-Persons Test; and (2) a Size-of-Transaction Test; unless the value of the transaction is greater than U.S. $260.7 million[2], in which event the transaction is reportable without regard to the size of the persons involved. The Size-Of-Persons Test is met if one person involved in the transaction has total assets or annual net sales of U.S. $13 million or more and another person involved has total assets or annual net sales of U.S. $130.3 million. The Size-Of-Transaction Test is met if the value of the transaction exceeds U.S. $65.2 million.

Two key and rather unique terms under the HSR Act are “person” and “control.” The “person “ required to make a filing may not be a party to the transaction. Under the HSR Act, a “person” is defined as an “ultimate parent entity” and all entities it controls, directly or indirectly. An ultimate parent entity is an entity that is not controlled by any other entity.

“Control” is defined as: (i) holding 50% or more of the outstanding voting securities of an issuer or, (ii) having the contractual power to designate 50% or more of the directors of a corporation or the trustees of a trust. In the case of an unincorporated entity (such as, an LLC or an LLP), “control” means having the right to 50% or more of the profits of the entity or 50% or more of the assets of the entity upon dissolution. It is important to note that the applicable percentage is “50% or more,” not “more than 50%.” Thus, it is possible for an entity to be controlled by two separate persons.

The Notification and Report Form that must be filed with each of the Enforcement Agencies requires a variety of information regarding:

(a) The transaction;

(b) Operations and revenues of the parties;

(d) Stockholders;

(e) Certain minority stockholdings; and

(f) Competitive overlaps between parties.

It also requires that copies of certain documents be submitted along with the Form, most significantly, any documents analyzing any competitive aspect of the transaction, such as, competitors, market shares, markets, possible new products, etc.

The waiting period begins to run after all parties have filed completed notification forms and the applicable filing fee has been paid. [3] The initial waiting period is 30 days, but it may be shortened if the Enforcement Agencies have no concerns with the transaction and early termination is granted. However, if an Enforcement Agency has competitive concerns, it may serve the parties with a request for additional information and documents (usually referred to as a “Second Request”). Typically this is a very burdensome and time-consuming process which requires the production of a great deal of information. Service of a Second Request stops the running of the waiting period under the HSR Act and “resets the clock.” An additional 30 day waiting period begins to run after the parties have complied with the Second Request.

A failure to comply with the report and wait requirements of the HSR Act subjects the violator to significant penalties. These include a civil penalty of U.S. $16,000 per day for each day the violation continues and a court order either prohibiting consummation of the transaction or requiring divestiture of the acquired business if the transaction already has closed.

3. The Exon-Florio Amendment

The Exon-Florio Amendment (“Exon-Florio”) is not an antitrust law; rather, it is a law designed to protect the national security of the United States.[4] Exon-Florio authorizes the President of the U.S. to suspend, prohibit or rescind any transaction which would result in the control of a U.S. business by a foreign person and which would threaten to impair the national security of the U.S.

Exon-Florio is administered by the Committee on Foreign Investment in the United States (“CFIUS”), which is a high level inter-agency committee authorized to assist the President in carrying out his responsibilities under the law. CFIUS is chaired by the Secretary of the Treasury and includes the heads of the following government departments and offices:

Justice
Homeland Security
State
Defense
Commerce
Energy
Labor
The Director of National Intelligence

The CFIUS notification and review process begins with the filing of a voluntary notice by the parties to a proposed transaction. The review must be completed within 30 days of the filing of the notice and the vast majority of transactions are cleared at the initial review stage.

However, CFIUS may initiate an investigation of the transaction if:

(1) CFIUS or a member agency believes that the transaction threatens the national security and the threat has not been mitigated through an agreement with the parties;

(2)The lead CFIUS agency reviewing the transaction recommends that an investigation be conducted;

(3)The transaction is a “foreign government-controlled transaction;” or

(4)The transaction would result in foreign control of any critical infrastructure of the U.S.

The investigation must be completed within 45 days.

At the end of the investigation, CFIUS may refer the matter to the President if:

Any CFIUS member recommends that the transaction be prohibited; or
CFIUS believes that a Presidential determination is appropriate.

The President then has 15 days to make a decision regarding the transaction. CFIUS is authorized to enter into agreements with the parties to mitigate any national security risk that maybe presented by a transaction.

Which U.S. businesses involve national security considerations are not listed in either the statute or the implementing regulations. Rather, CFIUS states that it must analyze the specific facts of a particular transaction. The term “critical infrastructure” is only defined in general terms in the statute as “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.” Nevertheless, by noting the kinds of transactions that CFIUS has reviewed, we are able to provide some illustrative examples of businesses that involve national security considerations. They include:

Defense and law enforcement;
Intelligence;
Information technology;
Transportation;
Advanced technologies;
Semiconductors and other products that have dual use applications;
Data protection;
Internet security;
Telecommunications; and
Natural resources and energy

The CFIUS regulations define a foreign government-controlled transaction as “any covered transaction that could result in control of a U.S. business by a foreign government or by a person controlled by or acting on behalf of a foreign government.” (31 C.F.R. 800.214) In reviewing foreign government-controlled transactions, among the factors CFIUS considers are:

The extent to which the foreign investor’s policies require investment decisions to be based solely on commercial grounds;
The degree to which the foreign investor’s management and investment decisions are made independently from the controlling government;
The degree of disclosure of the purpose, investment objectives and financial information of the foreign investor; and
The degree to which the foreign investor complies with the regulatory and disclosure requirements of the countries in which it invests.

The Exon-Florio review process is one of voluntary disclosure. Nevertheless, there is a significant benefit to complying with Exon-Florio when it is applicable and a significant risk in not doing so. If a transaction has undergone review by CFIUS, it is placed in a “safe harbor” and can never be challenged as violating Exon-Florio. However, if a transaction has not undergone review by CFIUS, it can be challenged as violative of Exon-Florio at any time, even years after the transaction has been completed.

Conclusion

Any non-U.S. company considering making an acquisition in the United States should be familiar with the three statutes discussed in this article. Because each of these laws can have a significant impact upon the proposed acquisition and each has its own particular guidelines or rules, it is strongly suggested that a non-U.S. company engage experienced and knowledgeable U.S. legal counsel early in the acquisition process. Such counsel can provide guidance as to the applicable legal requirements; assist in preparing any necessary filings; and, if necessary, negotiate with governmental authorities to attempt to resolve any competitive or national security issues. Such counsel can be an invaluable aid in achieving a successful result.

For more information, please contact Robert Magielnicki. Mr. Magielnicki is a partner in the Antitrust Practice Group in the firm's Washington, D.C. office.

[1] The enforcement policy of the Antitrust Division and the FTC, as well as their approach to analyzing mergers is set forth in their Horizontal Merger Guidelines, which can be found at www.ftc.gov/bc.

[2] All of the threshold amounts under the HSR Act are subject to revision annually based on the change in the U.S. Gross National Product. The revised figures usually are announced in January and go into effect in February.

[3] The filing fee ranges from U.S. $45,000 to U.S. $250,000, depending upon the value of the transaction.

[4] Exon-Florio is an amendment to the Defense Production Act of 1950. It has been further amended by the Foreign Investment and National Security Act of 2007.

FDA Continues Expansion Outside the U.S. with Opening of Mexico City Post

Sheppard Mullin — Mon, 14 Dec 2009 05:47:56 -0800

By Bram Hanono

The U.S. Food and Drug Administration (FDA) recently announced the opening of its new post in Mexico City. The new post is the FDA's third post in Latin America and the tenth international post the FDA has opened in the past 13 months. The other posts in Latin America are located in Santiago, Chile and at the FDA's Latin America Office headquarters in San Jose, Costa Rica. The agency's other new offices are in China, India and Europe.

The opening of the Mexico City post is part of the FDA's continuing effort to buttress food and medical product safety in the U.S. by working with its regulatory partners oversees. "The opening of this office represents an important step as we re-design our product safety strategy," said FDA Commissioner Margaret A. Hamburg, M.D. By opening up a post in Mexico City, the FDA is better able to place more emphasis on prevention with the help of the Mexican Government. Since more than a third of the fresh fruits and vegetables consumed in the U.S. and a large amount of medical devices come from Mexico, having FDA experts located permanently in Mexico will be mutually beneficial to both countries.

Staff assigned to the FDA's Mexico City post will work with its regulatory counterparts to harmonize regulations and foster collaborative initiatives to ensure the safety of food and medical products marketed in the two countries. Agencies in both governments will make efforts to find opportunities for joint training on food-borne illnesses and the oversight of food traded internationally. The FDA also plans to work with industry in Mexico as well. For example, Murray M. Lumpkin, M.D., FDA Deputy Commissioner for International Programs said, "FDA experts in Mexico City will work closely with local industries that ship food and medical products to the United States to improve their understanding of U.S. safety and product quality expectations."

For more information, please contact Bram Hanono. Mr. Hanono is an associate in the Business Trials Practice Group in the firm's Del Mar and San Diego offices.

Cross-Border Insolvency: A Primer on Chapter 15 of the U.S. Bankruptcy Code

Sheppard Mullin — Wed, 01 Jul 2009 12:10:07 -0800

By Gabe Matus

The current global economic crisis has spawned a recent wave of complex insolvency proceedings in jurisdictions spanning the globe. Add to the mix the increasingly global nature of business and economics and the result is that a debtor subject to an insolvency proceeding in one jurisdiction may likely have assets and operations in a number of other sovereign jurisdictions. Managing the interrelation between concurrent multi-jurisdictional proceedings involving the same debtor or affiliated debtors has been a challenge for court systems, debtors and creditors alike since the emergence of the global economy. As economists warn of continuing risks and concerns with regard to the global economic outlook,[1] the regime established under Chapter 15 of the United States Bankruptcy Code (Ancillary and Other Cross-Border Cases)[2] becomes increasingly relevant for creditors and debtors – both abroad and within the U.S. This article provides a brief overview of Chapter 15 and some of the issues relevant to parties-in-interest in cross-border insolvency proceedings.

The Origins and Purpose of Chapter 15

Chapter 15 was added to the U.S. Bankruptcy Code (the "Code") under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It embodies the principles of the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law in 1997 (the "Model Law"), and was adopted to replace Section 304 of the Code.

Chapter 15 provides for coordination of simultaneous bankruptcy and reorganization proceedings in U.S. and foreign jurisdictions by establishing guidelines for representatives of foreign debtors and creditors seeking access to U.S. courts and recognition by U.S. courts of foreign proceedings.[3] Specifically, the purpose of Chapter 15 is to incorporate the Model Law (1) to promote cooperation between the U.S. courts, trustees, debtors, examiners and other parties-in-interest and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases; (2) to establish greater legal certainty for trade and investment; (3) to provide for the fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested entities, including the debtor; (4) to afford protection and maximization of the value of the debtor's assets; and (5) to facilitate the rescue of financially troubled businesses, thereby protecting investment and preserving employment.[4]

As such, foreign debtors seeking to stay litigation in U.S. courts on the basis that such litigation would interfere with the foreign bankruptcy proceeding are required to employ the mechanisms of Chapter 15 to obtain such injunctive relief, if and to the extent available thereunder.[5]

Commencement of a Chapter 15 Case

Proceedings under Chapter 15 may be initiated only upon petition by a foreign entity acting through a "foreign representative."[6] After notice and a hearing, the U.S. bankruptcy court may enter an order recognizing the foreign proceeding as a "foreign main proceeding" or a "foreign nonmain proceeding." As noted below, the protections afforded the foreign debtor (and, conversely, the rights of a creditor seeking access to the debtor's U.S. assets) materially differ depending on the type of proceeding recognized by the U.S. court.

A "foreign main proceeding" is a foreign proceeding pending in a country where the debtor has the center of its main interests.
A "foreign nonmain proceeding" is a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment (i.e., a place of operations where it carries out non-transitory economic activity).[7]

In determining whether to file a petition for recognition under Section 1515 of Chapter 15, a foreign representative should consider relevant factors such as (i) whether permitting existing U.S. litigation to continue to conclusion might be a more efficient approach than to commence a Chapter 15 proceeding at the expense of the estate and (ii) the likelihood of the U.S. bankruptcy court to recognize the foreign proceeding as a foreign main proceeding or a foreign nonmain proceeding.[8] The foreign representative should also consider the availability provisional relief during the period from filing the petition for recognition until the court rules on such petition, available upon a showing that such relief is urgently needed to protect the assets of the debtor or the interests of the creditors and would not interfere with the administration of a foreign main proceeding.[9] Such relief may include staying of execution against the debtor's assets, entrusting the administration or realization of all or part of the debtor's assets located in the U.S. to the foreign representative or another person authorized by the court to protect and preserve assets that are perishable, susceptible to devaluation or are otherwise in jeopardy, suspending third party rights to transfer, encumber or dispose of the debtor's property or granting such additional relief as may be available to a trustee (other than the power to exempt property, avoid and recover preferences or fraudulent transfers or avoid certain liens).[10] Ideally, to the extent applicable, the debtor should seek such injunctive relief simultaneous with the filing of the petition for recognition.

Foreign Main Proceedings vs. Foreign Nonmain Proceedings

Upon "recognition" of a foreign proceeding by a U.S. bankruptcy court, the foreign representative is then empowered to "apply directly to a court in the United States for appropriate relief in that court," which is then bound to "grant comity or cooperation to the foreign representative" as it would a U.S. representative of a domestic bankruptcy proceeding.[11] However, the protections afforded to the debtor and the rights of a creditor seeking access to the debtor's U.S. assets will differ depending on the court's recognition of the foreign proceeding as a foreign main proceeding or a foreign nonmain proceeding. Such distinction focuses on whether the foreign proceeding is pending in a country where the debtor has the center of its main interest ("COMI"). Section 1516(c) of Chapter 15 states that, "in the absence of evidence to the contrary, the debtor's registered office… is presumed to be the center of the debtor's main interest."[12] However, a court will look to other ascertainable and objective factors that may be relevant to rebutting such presumption, including "the location of debtor's headquarters; the location of those who actually manage debtor, which, conceivably, could be the headquarters of a holding company; the location of debtor's primary assets; the location of the majority of debtor's creditors or of a majority of the creditors who would be affected by the bankruptcy case; and the jurisdiction the law of which would apply to most disputes."[13] Although practitioners should note that, in the absence of any specific objection to COMI, courts may look to the facts as set forth in the record and not merely "rubber stamp" a foreign main proceeding on the assertion of COMI presented by the debtor in its petition for recognition.[12]

Recognition as a Foreign Main Proceeding

Upon recognition by the court of a foreign main proceeding, the following protections apply (in addition to any discretionary relief available to a debtor in a "nonmain" proceeding as discussed later in this article):[15]

1. The provisions of Section 361 apply to the debtor and the property of the debtor located within the U.S. such that a secured creditor's interest in collateral is afforded adequate protection.

2. The Section 362 automatic stay becomes effective enjoining all actions in respect of pre-petition claims against the debtor and its property located within the U.S.

3. The provisions of Sections 363 (Use, Sale or Lease of Property), 549 (Postpetition Transactions), and 552 (Postpetition Effect on Security Interest) of the Code apply to the transfer of an interest of the debtor in property that is within the U.S. to the same extent as such sections would apply to property of an estate.

4. The foreign representative may operate the debtor's business and may exercise the rights and powers of a trustee under Sections 363 and 552 of the Code.

As compared to the effects of recognition as a "nonmain" proceeding (discussed below), recognition as a foreign main proceeding affords the debtor much broader rights and protections with respect to its assets located in the U.S. Accordingly, the determination of COMI plays a pivotal role in securing such rights and protections.

Recognition as a Foreign Nonmain Proceeding

Upon recognition by the court of foreign nonmain proceeding, the relief granted by the court is entirely discretionary and is subject to a showing that such relief "is necessary to effectuate the purpose of [Chapter 15 (as enumerated above)] and to protect the assets of the debtor or the interests of creditors."[16] Such discretionary relief may include a stay of actions for prepetition claims against the debtor or its property located within the U.S.; providing for the examination of witnesses, taking of evidence or the delivery of information concerning the debtor's assets, affairs, rights, obligations or liabilities;

Conclusion

Chapter 15 was implemented in order to protect and maximize the value of a debtor's assets and "to provide greater legal certainty for trade and investment as well as to provide for the fair and efficient administration of cross-border insolvencies, which protects the interests of creditors and other interested parties, including the debtor." While Chapter 15 is not a complete solution, given the continuing trend towards globalization, and the improved access that foreign representatives will have to U.S. courts under Chapter 15, a solid understanding of the advantages, and the pitfalls, under Chapter 15 will be essential to dealing with cross-border insolvency cases in the years to come.

For more information, please contact Gabe Matus. Mr. Matus is an associate in the Corporate and Securities Practice Group in the firm's New York office.

[1] See APEC Says Significant Risks Remain to Global Outlook, July 22, 2009 (available at http://www.bloomberg.com/apps/news?pid=20601082&sid=asTozg40Qghg#); Global Economic Slump Challenges Policies, World Economic Outlook Update – International Monetary Fund (January 28, 2009)(available at http://www.imf.org/external/pubs/ft/weo/2009/update/01/pdf/0109.pdf).

[2] 11 U.S.C. §§1501 et seq.

[3]See 11 U.S.C. §1501; Andrus v. Digital Fairway Corporation, 2009 WL 1849981 (N.D.Tex.)("Chapter 15 proscribes a clear and uniform procedure by which a foreign entity charged with management of a bankruptcy within its jurisdiction may reach out to American courts for assistance in achieving an efficient result.").

[4] 11 U.S.C. §1501.

[5]See Andrus at *3; U.S. v. J.A. Jones Const. Group, LLC, 33 B.R. 637 (E.D.N.Y 2005).

[6]11 U.S.C. §1509. A "foreign representative" is "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding." 11 U.S.C. §104(24).

[7]11 U.S.C. §1502.

[8]It should also be noted that the bankruptcy court may not recognize the foreign proceeding as either a foreign main proceeding or foreign nonmain proceeding if recognition is "manifestly contrary to the public policy of the United States," 11 U.S.C. §1506, or violates international treaties or agreements to which the United States is a party. 11 U.S.C. § 1503.

[9]11 U.S.C. §1519.

[10]Id.

[11]See 11 U.S.C. § 1509(b); Andrus at *2.

[12]The legislative history to section 1516(c) further explains that "the presumption that the place of the registered office is also the center of the debtor's main interest is included for speed and convenience of proof where there is no serious controversy." See H.R.Rep. No. 31, 109th Cong., 1st Sess 1516 (2005), U.S.Code Cong. & Admin.News 2005, pp. 88, 175.

[13]In re SPhinX, Ltd., 351 B.R. 103, 117 (S.D.N.Y. 2006).

[14]See In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, 374 B.R. 122 (S.D.N.Y. 2007), affirmed in 389 B.R. 325 (S.D.N.Y 2008).

[15]11 U.S.C. 1520.

[16]11 U.S.C. §1521.

An Introduction to the Business of Government Contracts

Sheppard Mullin — Wed, 01 Jul 2009 08:54:56 -0800

By Christopher Noon

Introduction

Today's economy has created significant challenges for companies around the world. The tough business environment has companies facing decreased revenues, the prospect of employee layoffs, increased lending standards and fewer business opportunities. With all the present uncertainty, businesses are well-advised to expand their horizons with new or unconventional opportunities. One such opportunity every business can consider is doing business with the U.S. Government. In a recession, the Government can be a very attractive business partner for many companies as spending is increased by the Government to pull the economy out of recession. With the recently enacted American Recovery and Reinvestment Act of 2009, the Government plans on increasing spending by hundreds of billions of dollars, and will do so mostly through the issuance of government contracts. Businesses in all sectors of the economy stand to profit from this increase in spending if they are well-positioned to win these contracts. The question then remains: how does a company get started in government contracts?

Getting Started

Before any company can bid on a government contract, it must first register with the Central Contractor Registration (CCR), the primary registrant database for the U.S. Government and its agencies. In order to register, the company is required to have a DUNS number, which is provided by Dun & Bradstreet, Inc. for free by visiting their website.[1] Once registered with the CCR, a company can bid on most government contracts issued by the Government.

The primary portal for finding government contracts is FedBizOpps.gov, otherwise known as FBO. FBO is used by both agencies and vendors to post and bid on contracts. Although registration with the FBO website is not necessary to search for opportunities, it's recommended that companies do so if they plan on eventually bidding on contracts. There are thousands of opportunities on the FBO website and sifting through them can be a daunting task, and new solicitations are posted daily. Therefore, every company that desires to do business with the federal government will find it most helpful to develop a plan of action: (i) determine the good or service the company can provide to the Government, and (ii) determine the department or agency that needs this good or service. Given the extensive opportunities, many new government contractors find it useful to focus on a small number of government agencies or departments that could most benefit from their product or services. Though the FBO website is beneficial for finding posted solicitations, it is not the only route for doing business with the Government.

Another option is the GSA Schedules (also referred to as the Multiple Award Schedules or the Federal Supply Schedules), the Government's method of providing long-term government-wide contracts on over 11 million commercial products and services. The GSA negotiates with contractors for the lowest possible price so that contracts procured through the GSA Schedules comply with all laws and regulations. Government agencies or departments can search and purchase from these Schedules without the hassle of issuing a solicitation. Therefore, the GSA Schedules acts as a convenient link between agencies and contractors. The GSA Schedules can provide incredible opportunities for a contractor and is a highly recommended route for any company aspiring to do business with the Government. Another advantage of becoming a GSA Schedule contractor is that state and local governments also have access to the GSA Schedules, providing additional potential customers for contractors.

Small & Disadvantaged Business Set-Asides

Another major entry-point for many companies is through one of the many set-asides established for small businesses or socially and economically disadvantaged businesses. The definition of "small business" varies depending on the industry sector. The Government utilizes the North American Industry Classification System (NAICS) to identify and establish the industry sectors. Every company will be required to provide the NAICS industry classification codes that apply to their company. Government contract solicitations will designate the applicable size standard for a contract, based on the industry classification of the goods or services being procured. Therefore, it's important for a company aspiring to compete for these small business set-aside contracts to know their applicable industry codes and size standard. Small businesses will find many useful tools and resources on the Small Business Administration's (SBA) website.[2]

The most important set-aside program for socially and economically disadvantaged businesses is known as the Section 8(a) Business Development program, managed by the SBA. In order to be eligible for the program, the business owners must be U.S. citizens and meet certain other requirements related to ownership, size, character, and most importantly, social and economic disadvantage. Certain racial groups are classified as socially disadvantaged: Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and Subcontinent Asian Americans. Otherwise, if not a member of a designated group, the business owner must provide evidence of social disadvantage. Applying to the 8(a) program first requires registering with the CCR and with the SBA's General Log-in System (GLS).[3] The application to the 8(a) program is accessible at the GLS and once submitted is reviewed for certification by the SBA.

Subcontracting

Aspiring government contractors that are also small businesses may find it easier and more practical to pursue subcontracting for a prime government contractor. Prime contractors with contracts exceeding certain thresholds are required by law to provide subcontracting opportunities to small businesses. Would-be subcontractors should identify potential prime contractors of a particular business opportunity and develop contacts and relationships with these contractors. This can be a great way for many small companies to get their foot in the door and develop good reputations in the procurement community.

Conclusion

Doing business with the Government can provide companies of all sizes and in all industries important economic opportunities. With the economy in a deep recession, these opportunities may prove critically important to many companies' survival. Learning the keys and skills to developing a business relationship with the Government can be challenging and will take some time. However, positioning your company to do business with the Government is time well spent.

For more information please contact Christopher Noon. Mr. Noon is an associate in the Government Contracts & Regulated Industries Practice Group in the firm's Washington, D.C. office. Please visit our Government Contracts Law Blog at www.governmentcontractslawblog.com.

[1] http://www.dnb.com/

[2] http://www.sba.gov

[3] Available at https://eweb.sba.gov/gls/dsp_addcustomer.cfm

California Appellate Court Finds Service On Foreign Subsidiary In California Sufficient To Effect Service In Spite Of Hague Convention Service Requirements

Sheppard Mullin — Wed, 01 Jul 2009 08:43:41 -0800

By Norma García Guillén and Serena Martinez

In May 2009, the California Court of Appeal for the Fourth District decided a case that essentially upholds service of a foreign entity's subsidiary in California is sufficient to effect service, in spite of the Hague Convention requirements. This will undoubtedly change the process by which foreign companies may be served in California, especially in these difficult economic times.

In Yamaha Motor Co. Ltd. v. Superior Court, a state appellate panel held that lawyers whose clients sue a foreign company can avoid the costly process of serving papers overseas by instead serving the company's American subsidiary.[1] The case arose from a lawsuit against Yamaha filed by Jack R. Connors, who was allegedly injured when he was riding a 2005 Yamaha Rhino recreational utility vehicle. Connors, and several other Yamaha Rhino drivers, sued Yamaha over the vehicles. Connors' attorney filed some of the cases using the traditional Hague Service Convention method, but that method of serving defendants is both significantly more expensive and time consuming. Therefore, to avoid the costly and time consuming Hague Convention service requirements, Connors' attorney served the complaint on Yamaha Motor Corp, USA, Yamaha's wholly owned domestic subsidiary in the U.S. and the exclusive importer and distributor of Yamaha Rhinos.[2]

The decision deeming this option acceptable offers an alternative to attorneys who previously had to comply with the Hague Service Convention when serving a foreign defendant. The Convention is an international treaty that was adopted in 1965 to allow service of judicial documents from one signatory state to another without going through diplomatic channels. Article 1 of the Convention says it applies "in all cases, in civil or commercial matters where there is occasion to transmit a judicial or extrajudicial document for service abroad."[3]

The panel found that both federal and California state law supported their decision. The federal Supreme Court in Volkswagenwerk Aktiengeselschaft v. Schlunk held that when service is valid under state law on the American subsidiary of a foreign manufacturer, there is no need to serve papers in accord with the Hague Convention.[4] The appellate panel drew support from California state law from the California Supreme Court case Cosper v. Smith & Wesson Arms Co. which ruled that service on the California representative of a foreign parent company is valid.[5] In Cosper, a police officer whose revolver exploded on him sued the Massachusetts corporation that manufactured the firearm.[6] The Massachusetts corporation, however, had no agents, salesmen, or other employees in California but it did have a contract with a California representative to promote, on a "non-exclusive basis" the sale of its products on the West Coast. The Supreme Court held that service on this representative was sufficient to serve the Massachusetts corporation because the representative was the "general manager in this State," and thus satisfied the "minimum contacts" requirement.[7] In Yamaha, the relationship of the named defendant, Yamaha-Japan, to the American entity served, Yamaha-American, is much more intimate than that of the Cosper manufacturer and the non-exclusive sporting goods seller of Smith and Wesson's products.

Implications

The Yamaha decision has very positive implications for plaintiffs in terms of keeping costs down and serving process in a more timely manner. As noted above, the plaintiff in Yamaha was able to save thousands of dollars by serving the American subsidiary instead of through the Convention requirements, which would include, for example, a $7,000 fee for translation of the complaint into Japanese. Furthermore, he was able to accomplish service in much less than the 90 days Connors' attorney claims it would have taken to have had the complaint served on the Ministry of Justice in Tokyo.[8]

While perhaps quicker and more cost effective, the Yamaha panel also warned of the potential downfalls of circumventing the Convention by serving American subsidiaries. In a footnote, the court cautioned that, "Easy is not necessarily better."[9] The court cited Justice O'Connor's reasons "to do it the hard way" from Volkswagenwerk Aktiengesellschaft: "Those who eschew [the Hague Service Convention's] procedures risk discovering that the forum's internal law required transmittal of documents for service abroad, and that the Convention therefore provided the exclusive means of valid service. In addition, parties that comply with the Convention ultimately may find it easier to enforce their judgments abroad. [citations omitted] For these reasons, we anticipate that parties may resort to the Convention voluntarily, even in cases that fall outside the scope of its mandatory application."[10]

Possible Future Challenge

The Yamaha court also left room for future challenges to Cosper. In Cosper, the court "never really grappled with the anomaly that a mere non-exclusive sales representative could not really be described as a general manager in this state."[11] The appellate panel in Yamaha went on to explain that "[t]o be a manager, much less a general manager, implies a measure of formal control. Neither the sales representative in Cosper, nor Yamaha-America here, have any real control over their principals—they simply did (or do) their master's bidding," with Yamaha-America even more tightly controlled than the sales representative in Cosper.[12] The panel made clear their disagreement with Cosper's reading of "general manager", but ultimately respected stare decisis.

In sum, while enforcing a judgment without having followed the Convention Service requirements may pose a very real problem for litigants, initial service may be effected on a foreign entity's subsidiary all in an effort to avoid costs and the timely procedures set for the by the Convention.

Service Requirements Under the Hague Service Convention for Service in Mexico

Service of documents under the Hague Convention in Mexico is a 3-step process:

(1) Preparation of the Letter Rogatory Form;

(2) Translation of the Complaint and Letter Rogatory Form and obtaining proper certificates of authenticity from the County Superior Court and the California Secretary of State (notarization, verification, and apostilles); and

(3) Accomplishing Service in Mexico so that a judgment issued by the California Superior Court can be enforced by a Court in Mexico, which involves:

(a) Acceptance of U.S. papers by the Director General for Consular Services of the Mexican Ministry of Foreign Affairs;

(b) Acceptance of U.S. papers by the Superior Court for the State of Mexico;

(d) Filing of the service documents with the Mexican Ministry of Foreign Affairs and the Superior Court for the State of Mexico, with transmission of the service documents back to us for filing in the Los Angeles Superior Court.

For more information please contact Norma García Guillén and Serena Martinez. Ms. García Guillén is an associate in the Business Trial and Latino Business Practice Groups in the firm's Orange County office. Ms. Martinez is an associate in the Business Trial and Latino Business Practice Groups in the firm's Orange County office.
_________________________________________________________________

[1] C.A. 4th/3, DAR (2009).

[2] "Alternative Method for Serving Foreign Companies Is Upheld by Appeals Court" John Roemer, Daily Journal, May 28, 2009 p1.

[3] Yamaha at n4.

[4] 486 U.S. 694 (1998).

[5] 53 Cal.2d 77 (1959).

[6] Id.

[7] Id. at 8-9.

[8] Roemer, supra at 4.

[9] Yamaha at n1.

[10] Id.

[11] Id. at 11.

[12] Id.

U.S. Immigration Options & Strategies for Latin American Investors and Business Professionals - An Introduction to Employment-Eligible Nonimmigrant Visas (E, H & L) & Green Card Options

Sheppard Mullin — Wed, 01 Jul 2009 08:13:33 -0800

By Albert Lu

With the right knowledge, business investment vehicle, and strategic planning, most Latin American investors, business owners, executives/managers, and in some cases essential-skill employees with specialized knowledge/training, can come to work and live in the United States based on valid nonimmigrant visas while accompanied by their dependent family members. In some instances, if the long-term business/investment need is present and ongoing, the same persons may in time also pursue employment-/investment- based immigrant options and qualify for lawful U.S. permanent residency status – more commonly known as "green card." This article is a brief introduction of these visa options and how to pursue them.

First Phase: Visitor Visa Required for Coming to the United States

Today, nationals from Latin American countries need valid passports in order to come to the United States. The passports should be machine-readable and valid for at least six months past the date of entry in order to ensure admission at the ports of entry, and ideally the validity should cover their intended duration of stay in the United States.

In addition to valid passports, all Latin American nationals must also possess valid U.S. visitor visas issued by U.S. consulate overseas in order to be admitted into the United States as temporary visitors for business (B-1) and/or pleasure (B-2). Some Mexican nationals with frequent needs to enter/exit the United States may be issued Border Crossing Cards that take the place of standard B-1/B-2 visas stamped into one's passport. Visitors admitted into the United States are all issued Forms I-94 upon entry that state their status and duration of allowed stay – generally between two weeks to six months depending on: their stated purpose/need for visiting, their visa validity/expiry date, and their pattern of prior visits.

Due to overall overwhelming demand and statistics of prior immigration violators (visitor who choose to overstay/remain in the United States illegally), as well as issues with insufficient and/or fraudulent documentation, nationals from certain Latin American countries may find it difficult to apply for and receive valid U.S. visitor visas from their governing U.S. consulate. This tends to be a problem especially for younger (under 21) and older (retirement-age) persons, as well as adult persons without strong established ties to their home country that demonstrate an intent to return home upon completion of visit. Most established business owners/professionals and successful entrepreneurs seeking to invest in the United States should already possess or be able to receive U.S. visitor visas without much difficulty.

Visitor visa and entry in B status allows investors to come to the United States and seek/research potential investment opportunities, survey potential sites/companies, consult/meet business partners, and negotiate business leases and contracts. It also lets business professionals attend conferences, meetings, trade shows and other related functions and events. In some cases, B-1 visitors are allowed to come and receive training from U.S. companies – but such training must not result in gainful employment services rendered for the benefit of any U.S. company. In short, B-1/B-2 visitors are not allowed to work for U.S. entities nor receive payment for employment services rendered while visiting the United States – other than expense allowance/reimbursement for related travels. And because unauthorized employment in the United States can bar a person from making future entries, pursuing U.S. visas, or later qualifying for immigration benefits such as green card status, one must be careful not to abuse their visitor visa/status, which includes not overstaying their issued I-94 duration of stay.

Second Phase: Employment-Eligible Temporary Nonimmigrant Visa/Status

In order for Latin America nationals to work/live in the United States as business investors, executive/managers, or professional employees, they most likely need to pursue either an H-1B, L-1 or E-1/E-2 visa. Certain Mexican nationals working in specific NAFTA-designated professions can also qualify for a TN visa. Other nonimmigrant work-eligible visa options may exist based on specialized circumstances.

1. H-1B Visa for Specialty Occupation Employees:

H-1B visa is commonly used by U.S. companies to sponsor/hire professional employees, who are university graduates, to perform in specialty occupation positions (such as engineering, computer science, accounting, … etc.) that require specific college-degreed background. While H-1B is a popular option for employing foreign nationals already present in the United States as a student or intern, due to its annual numerical cap and related timing restrictions, with the exception of Chilean who enjoy a specialty treaty/status and are accorded special H-1B cap privileges, H-1B visa is not an option favored by overseas-based persons/companies seeking to bring its local employees into the United States.

2. L-1 Visa for Intracompany Transferee:

The most commonly used visa for business owners/professionals with established business operations overseas who seek to come to the United States to start up and/or work for a related U.S. company is the L-1 visa.  Basically, If the incoming individual has either served in an executive or managerial role (L-1A) or as a specialized-knowledge employee (L-1B) overseas for at least one year at an eligible foreign company whose scope, size, business operation data are documented and meet the basic L-1 immigration criteria, and the foreign company desires to transfer the individual to work in the United States for a related U.S. business entity (ownership commonality between the two transferring entities must be at least 50%), the person can qualify to apply for an L-1 visa in order to come and work in the United States.

As with the H-1B option above, an L-1 petition by a sponsoring U.S. entity must first be filed with and approved by USCIS (formerly INS), then upon approval, the individual would consular process for an L-1 visa. At that point the dependent spouse and minor children (under 21 years of age) could join and apply for matching L-2 dependent visas. Through subsequent status renewal filings, L-1 status can easily be maintained for five to seven years, and for L-1 persons who are only present in USA intermittently, the status can even be prolonged indefinitely. Keep in mind the two business entities involved in the L-1 intracompany transfer (overseas and USA) simply need to be related in ownership interest (by at least 50%), not necessarily in line-of-business. Lastly, the sponsoring business entities must be viable and possess certain scope - if one is to qualify as a transferring executive/manager, there must be worthwhile business activities and subordinate personnel to oversee/manage.

3. E-1/E-2 Visa for Treaty Trader & Treaty Investor

For nationals of certain qualified countries with existing treaty of commerce and navigation (or a treaty of bilateral investment) with the United States, the E-1 visa allows them to come to the United States for the purpose of carrying on substantial trade, while the E-2 visa allows them to come to develop and direct a business enterprise in which they have invested, or are actively in the process of investing, a substantial amount of capital. Over recent years, while E-1 has restricted its qualifying criteria (trade conducted must be principally between the two countries), E-2 Treaty Investor visa remains a popular and useful option for qualified investors and business entrepreneurs interested in living and doing business in USA – especially so if the person does not operate an existing business overseas that could serve as basis for the L-1A option described above.

For Latin American persons not already in the United States, initial E-2 visa application must go through their governing U.S. consulate. The consulate will closely scrutinize all details related to the E-2 investment, as well as the visa applicant, including: tracing the origin and tracking the transfer of invested capital; judging if the visa applicant serves in a qualifying E-2 function (investor, executive/manager, or essential-skill employees – must possess same nationality as the investor), and ensuring the E-2 investment is bona fide, substantial, non-marginal, committed & at-risk. If approved, E-2 visa validity can vary from one to five years depending on reciprocity rules, and following entry, individual E-2 status duration is typically granted for two-years each time while allowing for indefinite renewals – a distinct advantage over most other employment-eligible nonimmigrant visa options. Whether an investment vehicle and business enterprise qualifies for E-2 visa would require individual assessment, and its long-term renewal viability also requires sound legal strategy and ongoing business planning.

Currently, Latin American countries/nationals that are eligible for E-2 visa include: Argentina, Bolivia, Chile, Colombia, Costa Rica, Ecuador, Grenada, Honduras, Jamaica, Mexico, Panama, Paraguay, Suriname, and Trinidad & Tobago.

Third Phase: Permanent Residency ("Green Card") in the United States

Lawful U.S. Permanent Resident status, commonly known as "green card," allows foreign persons to reside permanently in the United States. Some investors, entrepreneurs and business professionals seek green card status in the United States not necessarily/primarily for themselves, but for the benefit of their accompanying dependent family members.

There are various employment-/investment-based immigrant options through which one can achieve green card status. For instance, an eligible L-1A intracompany executive/managerial transferee can apply as an EB1-3 (Employment-Based First Preference – Third Category) Multinational Executive/Manager, and be able to achieve green card status very quickly (within 1-2 years of first arriving in the United States). Other special employment-based first preference categories exist for: Extraordinary Ability Persons (EB1-1), and Outstanding Researchers/Professors (EB1-2). These EB1 categories tend to yield fastest green card results, but they also carry high standards of qualifications.

Other slower employment-based green card sponsorship options (EB2 & EB3) also exist, they generally involve an extra step called PERM Alien Labor Certification – an application filed by the U.S. sponsoring employer to demonstrate that no minimally qualified U.S. worker exist within the local job market for the wanted position following careful and prescribed advertisement and recruitment steps. This extra step takes time and effort to complete, especially when local unemployment rate is high, but they may be the best option available for those foreign national employees who do not qualify under heightened EB1 criteria.

Lastly, many savvy investors may have heard of the EB5 "Million Dollar Investment Green Card", where a person who invests $1,000,000 in a new business enterprise within the United States will, in time, be able to achieve green card status for self and family members. In fact, eligible EB5 business enterprises that lead to local job creation in government-designated Targeted Employment Area or Rural Areas may only require $500,000 of initial capital investment. Moreover, EB5 can also take the form of individuals investing in various government-approved "Regional Centers" created locally to pool together multiple EB5 individual/investment funding and apply them into a larger business enterprise with ongoing job-creation capability – sometimes involving real estate purchases and subsequent home constructions, etc.  As with any business investment vehicle, the risks inherent in such options can vary greatly, especially if dependent on particular Regional Center's executive direction and/or management team.

While EB5 does exist and continues to serve as a viable option for investment-based green cards, ever since its inception, EB5 adjudication processing time have varied greatly and even drag on interminably based on individual case merit – often fraught with fraud. In addition, new regulations governing EB5 continue to evolve – the key of which is stricter documentation proving the full-time employment of 8 to 10 U.S. employees created by the individual EB5 investment, as well as the duration required for maintaining the investment vehicle / business enterprise due to the fact that initial issuance of EB5 conditional (two-year validity) green cards require timely and fully-documented filing and approval in order to achieve condition removal and yield permanent green card status. Therefore, based on current circumstances, for an investor with the means to consider the EB5 option – especially if the investor already has established business interests overseas, one should closely examine the viability of combining the L-1A visa & EB1-3 green card option described above. If all underlying eligibilities can be met, this combined approach could allow the investor much more control over the investment capital and business (both in terms of initial amount and subsequent expenditure), while also yield the permanent green card status more quickly.

Immigrating to the United States requires successful navigation of U.S. immigration options and strategies, along with long-term business planning. Individual investors and business executives should consult legal professionals before making this important pursuit.

For more information please contact Albert Lu. Mr. Lu is an attorney in the Labor and Employment Practice Group in Sheppard Mullin's San Diego Office.

An Update on The U.S.-Mexico Border 2012 Program

Sheppard Mullin — Wed, 01 Jul 2009 08:01:25 -0800

By Wayne Nastri and Howard Berman, Dutko Worldwide

The regional offices of the United States Environmental Protection Agency (USEPA) are tasked with implementing this nation’s environmental policy through operations and enforcement. USEPA’s mission remains straight-forward; protect human health and the environment. It’s a tremendous challenge that faces many hurdles including insufficient resources to address all the tasks at hand. These challenges are particularly acute along the US-Mexico border. The Southwest’s desert arid climate compounds drinking water and wastewater issues. Raw sewage flowing into the United States is especially problematic during wet weather. Many older vehicles, often those that can’t meet California emission standards, are sold into Mexico, compounding air quality challenges along the border. Unscrupulous individuals illegally dispose of hazardous waste along the border and often times there are either insufficient or no programs in place to adequately deal with wastes that are accumulated in the border region. Compounding these issues are the thousands of people entering the US throughout the border region, leaving behind tons of solid waste, including bicycles, clothes, and water bottles.

While nearly 12 million people live along the border, pollution knows no boundaries. Unfortunately, border residents suffer disproportionately from many environmental health problems, including water-borne diseases and respiratory problems[1]. These issues are not new and the US-Mexico Border 2012 Program was announced in September, 2002 to focus on cleaning the air, providing safe drinking water, reducing the risk of exposure to hazardous waste, and ensuring emergency preparedness along the US-Mexico Border[2]. The 1983 Agreement on Cooperation for the Protection and Improvement of the Environment in the Border Area (La Paz Agreement), signed in La Paz, Baja California Sur, Mexico, is the legal basis for the Border 2012 Program. The Program has six goals:

1. Reduce water contamination

2. Reduce air pollution

3. Reduce land contamination

4. Improve environmental health

5. Emergency preparedness and response

6. Environmental stewardship.

The Program is a true collaboration between the United States and Mexico and has many stakeholders involved in all facets. Stakeholders include local communities, the private sector, non-governmental organizations, representatives of the US and Mexico border states, tribal representatives, federal representatives, North American Development Bank, and the Border Environmental Cooperation Commission to name a few.

These stakeholders work together through four regional workgroups (i.e., California-Baja California, Arizona-Sonora, New Mexico-Texas-Chihuahua and Texas-Coahuila-Nuevo Leon-Tamaulipas) with each region focusing on its key concerns. In addition, there are also border-wide workgroups focusing on environmental health, compliance and enforcement, and emergency preparedness and response[3].

Increasing access to safe drinking water and treatment of wastewater is one of the key priorities of the Program. Every two years, USEPA coordinates requests for proposals for the design and construction of drinking water and wastewater treatment systems. Thus far EPA has approved $544 million dollars of Border Environmental Infrastructure Funds (BEIF) to be spent for a total construction cost of $1.6 billion. Importantly, every EPA grant dollar leverages approximately two dollars from other sources and of the 12 million border residents, more than 7 million will benefit from all the projects once completed (nearly 4 million are currently benefiting from completed projects).

The demand for BEIF far exceeds the funds available. Unfortunately, the manner in which projects were funded (i.e., complete project funding) lead some to believe that the funding wasn’t always utilized in the most efficient manner. Typically, US funding focused on total project allocation, resulting in hundreds of millions of dollars accumulating in the BEIF. Appropriators saw large unspent funds and surmised that since the funds weren’t being spent in a timely manner, the annual allocation could be reduced. This resulted in a revision to how funds are allocated. Previously, the US approach to get projects funded was to finance them completely. Now, projects can be funded for the design or construction phase, and not necessarily both at once. Additionally, key milestones and timeframes are more closely monitored and reported. Projects off schedule risk losing funding.

There is an expectation that the BEIF allocation will increase in the future as spending rates improve and the unspent funds decrease. As with any programmatic change, there are concerns that should be noted. Bifurcated funding may result in projects only being partially funded. It is anticipated that as one project phase (i.e., design) is completed, funds will be available for the next phase (i.e., construction). The fear, however, is that funding may not be available and the project could potentially cost more once funds are available. Depending on the delay in funding, it is possible that projects may need to be redesigned and thereby cost even more. Only time will tell how this plays out.

Much has also been accomplished in reducing land pollution in recent years. Millions of tires have been removed and either recycled or used as fuel. A tire management program is being developed to address this insidious problem that is not only an environmental hazard but also a health hazard. Recycling programs are being developed to address electronic waste and e-waste collection events have been very successful and exceeded expectations. Old and unwanted pesticides have been collected that had the potential to adversely impact human health and the environment, and the Metales y Derivados, an abandoned lead recovery facility has been capped.

A significant investment has also been made in increasing emergency response capabilities and coordination in the border area. This has been accomplished through the development of Memorandum of Understanding (MOUs) in border sister cities. Training and field exercises involving coordination and communication have already resulted in improved response readiness.

Politically, there has been much attention focused on the US-Mexico Border within the last year. The Border Governors meet annually, with the last meeting hosted by Governor Schwarzenegger in Hollywood, California last August. The benefits of building green economies throughout the border region was highlighted in that meeting. President Obama, in his recent trip to Mexico announced the Bilateral Framework on Clean Energy and Climate Change. As reported by the White House[4], “The Bilateral Framework will focus on: renewable energy, energy efficiency, adaptation, market mechanisms., forestry and land use, green jobs, low carbon energy technology development and capacity building. The framework will also build upon cooperation in the border region promoting efforts to reduce greenhouse gas emissions, to adapt to the local impacts of climate change in the region, as well as to strengthen the reliability and flow of cross border electricity grids and by facilitating the ability of neighboring border states to work together to strengthen energy trade”. It was further reported, “Through our collaboration in the Border 2012 program, working with our respective border states to provide opportunities for information exchange and joint work on renewable energy, such as wind and solar, that could include technical and economic project feasibility studies, project development, and capacity building in the border region. Other border work could include a bilateral border crossing planning group to develop strategies to reduce emissions from idling vehicles, among other initiatives that may be deemed appropriate”.

Given the high level political support, it will be interesting to see what really emerges along the border in the coming months and years. The President has already backed away from revisiting the North American Free Trade Agreement and there will undoubtedly be protests from Mexico about the failure of the US to allow Mexican truckers free access to the entire US. Further, the President has called for Executive Agencies to reduce their budgets by $100M[5]. While this is not a significant amount in terms of the overall federal budget, it could be devastating to a program or group of people depending on where the cuts are made. The ongoing construction of the Border fence continues to be a source of tension and the current state of the economy, drug wars, and the public health threat associated with the H1N1 virus are also impacting Border plans and programs.

With this backdrop, it would be easy to assume that not very much will be accomplished in the coming months and years. However, this assumption overlooks one very important aspect associated with work along the border. The people involved, whether they be representatives of federal agencies or local communities, are extremely hardworking and dedicated to improving conditions along the border. They will approach this in a fashion that leverages resources between the public and private sector. Accomplishments will be communicated as broadly and loudly as possible in order to maintain awareness and pressure to keep resources flowing. In addition, there will be an increased emphasis on enforcement, for compliance, deterrence, and supplemental environmental projects that provide additional benefits to impacted communities. We believe there will be continued attention and focus on border issues and continued success in addressing the most basic health and environmental issues in the border region, including, but not limited to improved access to safe drinking water and improvement in wastewater treatment.

This article was written by Wayne Nastri & Howard Berman of Dutko Worldwide.

[1] http://www.epa.gov/usmexicoborder/framework/index.html

[2] http://www.epa.gov/usmexicoborder/index.html

[3] http://www.epa.gov/usmexicoborder/framework/background.html

[4] http://www.whitehouse.gov/the_press_office/US-Mexico-Announce-Bilateral-Framework-on-Clean-Energy-and-Climate-Change/

[5] http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-after-Cabinet-meeting-4/20/09/

Summary of HEART Law (U.S. Expatriation Tax Provisions)

Sheppard Mullin — Thu, 23 Oct 2008 11:26:05 -0800

By John Bonn, Keith Gercken and Nancy Howard

On June 17, 2008, the President signed H.R. 6081, the Heroes Earnings Assistance and Relief Tax Act of 2008 (“HEART”). HEART adds new provisions to U.S. law that significantly change the tax treatment of persons who give up their U.S. citizenship or long-term permanent resident status.

The law, which adds a new Section 877A to the Internal Revenue Code (“Code”), applies to any “covered expatriate” whose date of expatriation occurs on or after June 17, 2008. A covered expatriate is either (1) a U.S. citizen who relinquishes his or her citizenship, or (2) a long-term resident of the U.S. who ceases to be a lawful permanent resident of the U.S., if the expatriate in either case (A) had an average annual net income tax liability of more than $139,000 (adjusted for inflation after 2008) for the 5 years before the expatriation, or (B) has a net worth of $2,000,000 or more at the time of expatriation. A long-term resident is a person who is a lawful permanent resident of the U.S. (a green card holder) in 8 of the 15 years ending with the expatriation. There are some exceptions, including some relief for dual citizens or persons who relinquish citizenship before age 18-1/2.

For a covered expatriate, the HEART law imposes U.S. federal income tax on all of the expatriate’s assets as of the date before the expatriation, as if the assets had been sold on that date. The gain is limited to appreciation that occurred while the expatriate was a U.S. citizen or lawful permanent resident, and $600,000 of gain is exempted from the tax (the exemption is adjusted for inflation after 2008). Subsequent gains or losses on an actual sale will be adjusted for the gains or losses taken into account on the deemed sale under § 877A.

Some special rules include the following:

The expatriate may elect to defer payment of the tax until the actual disposition of a particular asset (or the expatriate’s death, if earlier). If that election is made, the expatriate must furnish a bond or other security for the deferred tax, an interest charge will apply to the deferred tax, and the expatriate must waive any treaty benefits for the tax liability.
Eligible deferred compensation items (those paid by a U.S. payor for which the expatriate provides notice and waives any treaty reduction) are not subject to immediate tax upon expatriation. Instead, the U.S. payor must withhold 30% from any payment to the expatriate.
Other deferred compensation items that are not eligible for this treatment will be valued at their present value as of the time of expatriation and taxed as ordinary income at that time.
Certain tax-deferred accounts such as IRAs or health savings accounts are treated as being fully distributed on the date before the expatriation and are taxed at that time.
If the expatriate was a beneficiary of a nongrantor trust on the day before the expatriation, any later distribution from that nongrantor trust to the expatriate will be taxed on the amount that would have been taxable if the expatriate were still a U.S. citizen or resident, and will be subject to 30% withholding on that amount. In addition, if the trust distributes appreciated property to the expatriate, the trust will be taxed as if it had sold the property for its fair market value at the time of distribution.

The HEART law also adds new § 2801 to the Code, dealing with estate and gift taxes. Under § 2801, if a U.S. citizen or resident receives a gift or bequest from a covered expatriate, the recipient will be subject to a special U.S. tax at the highest gift or estate tax rate then in effect (currently 45%) on the value of the property that is received. Exceptions include the following:

Property that is subject to U.S. estate or gift tax imposed on the covered expatriate that is reported on a timely filed U.S. gift or estate tax return.
Gifts or bequests within a taxable year whose value is within the U.S. gift tax annual exclusion in effect for that year (currently $12,000).
Transfers to a spouse or charity that would qualify for the U.S. marital or charitable deductions.

The tax is payable by the U.S. recipient of the gift or bequest, and is reduced by any gift or estate tax paid to a foreign country with respect to that transfer.

The new HEART provisions replace the former expatriation tax regime for a covered expatriate whose expatriation occurs on or after June 17, 2008. The old law continues to apply to persons who expatriated before that date. Under the old law, certain expatriates were subject to an alternative tax regime for 10 years after expatriation. During that 10-year period, certain non-U.S. income continued to be subject to U.S. income tax, tax would be imposed on the expatriate’s worldwide income if the expatriate returned to the U.S. for more than 30 days a year during the 10-year period, and gifts of intangible assets were not exempt from U.S. gift tax during the 10-year period. In contrast, the new provisions in § 877A and § 2801 do not have a 10-year limit.

This is a general summary of the new HEART law as it affects the U.S. taxation of expatriates, and does not contain all of the details in the new law. Any affected person should consult a tax advisor as to his or her individual circumstances and the application of the new law.

CIRCULAR 230 NOTICE:

IN ACCORDANCE WITH TREASURY REGULATIONS WE NOTIFY YOU THAT ANY TAX ADVICE GIVEN HEREIN (OR IN ANY ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY ANY TAXPAYER, FOR THE PURPOSE OF (I) AVOIDING TAX PENALTIES OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED HEREIN (OR IN ANY ATTACHMENTS).

For more information please contact John Bonn, Keith Gercken or Nancy Howard. Mr. Bonn is a partner in the Corporate Tax Group of the Tax, Employee Benefits and Estate Planning Practice Group. Mr. Bonn is based in his office in Massachusetts and is affiliated with the Los Angeles, New York and Washington, D.C. offices of the firm. Mr. Gercken is a partner in the Tax, Employee Benefits, and Trusts and Estates Practice Group in the firm's San Francisco office. Ms. Howard is special counsel in the Tax and Estate Planning Practice Group in the firm's Los Angeles office.

Reach of Foreign Corrupt Practices Act Exceeds Grasp: Due Process Limits

Sheppard Mullin — Thu, 23 Oct 2008 11:10:42 -0800

By Rebecca Roberts

According to Forbes, the government has initiated more proceedings under the Foreign Corrupt Practices Act in the last five years than it did in the previous twenty. Given the huge expense and political and economic implications of an enforcement action, many companies choose to settle rather than litigate. As a result, there is not much case law on the constitutional implications of the FCPA’s long reach, which may, in some cases, exceed due process requirements.

The FCPA prohibits offering or giving bribes or other payments to foreign officials for the purpose of obtaining or retaining business. In addition, the FCPA requires “issuers” to keep records that accurately reflect transactions and to maintain an adequate system of internal controls.

The FCPA may be enforced by the SEC, which has primary jurisdiction over issuers as well as their officers, directors, employees, and agents, or by the DOJ, which is responsible for civil enforcement against all other entities, foreign or domestic. The DOJ also has sole authority to bring criminal charges against any company or individual under the FCPA.

The FCPA casts a very wide net. In general it covers three different types of entitles: (1) Issuers or any company, whether foreign or domestic, subject to the registration or reporting requirements of the Securities and Exchange Acts (as well as their officers, directors, employees and/or agents), (2) domestic concerns or any U.S. person or entity other than an issuer, including U.S. citizens working for or retained by foreign entities and/or working abroad, and (3) foreign persons or any foreign corporation or foreign national acting within the United States.

The 1998 amendments to the FCPA, which implemented an international anti-corruption treaty, further expanded the scope of the law’s provisions. The amendments did away with any U.S. nexus requirements. Issuers and domestic concerns may now be liable under the FCPA even if the events did not take place in the United States. For example, a U.S. corporation or person may be liable for the conduct of its overseas agents even if no money touched the United States or no U.S. person participated in the illegal act.

The Foreign Persons’ provision, which also was part of the 1998 amendments, requires a U.S. territorial basis. However, it does not require extensive physical presence or a direct connection between the U.S. action and the violation. For example, the mailing of a letter, interbank approval of a check, wire transfer of funds, travel by air, train, or the interstate highway system by a foreign national in furtherance of a violation may give rise to a FCPA action.

Additionally, foreign businesses may be liable for “acts taken on their behalf” by their agents. Thus, foreign subsidiaries and foreign national employees of foreign subsidiaries have clear exposure.

The government has taken full advantage of these provisions. For example, the DOJ criminally charged British and American subsidiaries of ABB Vecto, a Swiss company, for bribing government officials to obtain contract work on oil exploration projects in Nigeria. The British subsidiary, based in Aberdeen, Scotland, was charged under the Foreign Persons provision. The allegations concerned wired transfers to the United States, that were reimbursing an agent for payments made to a foreign official.

The SEC also filed civil claims against the Swiss parent company, which had only recently become a reporting company in the United States. The two subsidiaries and the parent company settled with the SEC and the DOJ for approximately $26 million. In another case, the DOJ criminally charged Christian Sapsizian, a French citizen and a former deputy vice president of a Paris-based subsidiary of Alcatel, a French telecommunications company, for bribing officials in Costa Rica to obtain a mobile telephone contract.

Alcatel’s depository shares were traded on the New York Exchange and it later merged with U.S. company Lucent Technologies, Inc. Thus it qualified as an issuer. Sapsizian was a foreign citizen. Sapsizian’s alleged contact with the United States concerned an authorized payment from Alcatel’s bank in New York, through a bank in Miami, to an overseas account of the foreign official. Sapsizian pleaded guilty to two counts of violating the FCPA and conspiracy, and it faces a maximum sentence of 10 years in prison, a $250,000 fine, and $330,000 in forfeiture.

DUE PROCESS LIMITATIONS

The terms of the FCPA alone do not suffice to haul parties into court. The due process clause of the Constitution requires an adequate basis for jurisdiction over the party charged. Generally, if a party is served or is domiciled in the state in which the court sits or consents, a court has jurisdiction.

However, absent one of these traditional bases, due process requires a party to have certain minimum contacts with the forum such that maintenance of the suit “does not offend traditional notions of fair play and substantial justice.”

For criminal cases, due process requires courts to consider whether the defendant’s extraterritorial conduct has sufficient link with the United States. The Ninth Circuit has observed that this requirement serves the same purpose as the minimal contacts test.Thus, in both criminal and civil cases, a due process inquiry “ensuresthat a United States court will assert jurisdiction only over a defendant who should reasonably anticipate being hauled into court.”

In most cases, a court will consider whether a party has sufficient contacts with the state in which it presides when conducting a due process inquiry. However, some federal statutes authorize nationwide service of process and, if a party is served under such a provision, courts will consider whether its contacts with the United States as a whole are sufficient to establish Jurisdiction.

In addition, if a foreign party does not have sufficient contacts with a particular state, courts may look to whether the party has contacts with the United States as whole. If so, a foreign party can be sued anywhere in the United States. A due process inquiry for claims brought under the FCPA will likely look at the parties’ contacts with the nation as whole, but it will be a case-specific inquiry.

MINIMAL CONTACTS

When conducting a due process analysis, a court will consider the nature and quality of the party’s contact with the appropriate forum. If a party’s activities within the forum are “substantial, continuous, and systematic,” a court may have “general jurisdiction,”which means the party may be subject to suit on matters unrelated to its contacts to the forum. However, this is a high standard and usually limited to big companies doing a large amount of business within the United States.

It is far from clear that the government can haul any person within reach of the FCPA into court, particularly when the action concerns a foreign person and circumstances that do not impact any U.S. investor or company.

If a party is not subject to general jurisdiction, courts will consider whether the party is subject to jurisdiction limited to the claims related to its activities or contacts. Under this inquiry, courts will consider whether the party purposefully directed its activities toward residents of the forum or otherwise established contacts, and whether the cause of action arises out of or results from the party’s forum-related contacts.

Under the latter, a court may have jurisdiction if the FCPA violation would not have occurred “but for” the defendant’s forum-related activities. The court’s jurisdiction must be reasonable or “comport with traditional notions of fair play and substantial justice.”

Lastly, the court’s Jurisdiction must be reasonable or “comport with traditional notions of fair play and substantial justice.” Courts will balance a number of factors, including the inconvenience to the party, the forum’s interest in adjudicating the case and the existence of an alternative forum. This inquiry is also linked to the “purposeful availment” requirement: The weaker the evidence of the party’s forum related acts, the less unreasonableness a party will need to show to defeat jurisdiction, and vice versa.

Courts have declined to exercise jurisdiction over companies, some of which would fall under FCPA provisions, for lack of minimal contacts. For example, in Doe v. Unocal Corp., the Ninth Circuit declined to exercise jurisdiction in a RICO action over a French corporation whose stock was listed on U.S. exchanges and had U.S. and California-based subsidiaries. There was little evidence that the French corporation had purposefully availed itself of the benefits and/or protections of U.S. law. The oil pipeline contracts at issue had been entered into outside the United States, and the pipeline and sale of oil would not directly touch the United States.

The court concluded that the company’s stock listings alone were insufficient contacts, and without evidence that the subsidiaries served as alter egos or agents of the parent, jurisdiction was inappropriate.

In light of this standard, it is far from clear that the government can haul any person within reach of the FCPA into court, particularly when the action concerns a foreign person and circumstances that do not impact any U.S. investor or company. Rather, the case may depend on the significance of the effects of the conduct at issue. Parties who face potential FCPA enforcement actions should not overlook this basic requirement, guaranteed by the Constitution.

For more information please contact Rebecca Roberts. Ms. Roberts is an associate in the Business Trial Practice Group in the firm's Del Mar office.

Senate Bill 3325 - The Enforcement of Intellectual Property Rights Act of 2008: The Good, the Bad and the Ugly

Sheppard Mullin — Thu, 23 Oct 2008 11:02:03 -0800

By Beni Surpin and Crystina Coats

In his opening remarks to the Senate, when presenting Senate Bill S.3325 to the floor on July 24, 2008, Senator Evan Bayh (D – Ind.) stated: “if hundreds of our cargo ships were being hijacked on the high seas or thousands of our business people were being held up at gunpoint in a foreign land, there would be a great sense of alarm and unshakable government resolve to act. That, in effect, is what is happening today, yet we are not doing nearly enough to stop it.”

As a proponent of intellectual property rights reform, Senator Bayh’s analogy was used in the context of the $5 trillion contribution that intellectual property makes to the United States economy. In the movie industry alone, piracy is estimated to cost 140,000 U.S. jobs, $5.5 billion in wages, and $837 million in state and local tax revenue annually. It is estimated that American businesses are losing $250 billion, and over 750,000 jobs annually, because of intellectual property theft. In an effort to strengthen protection of United States intellectual property rights and prevent further violations of the same, a bipartisan group of Senators are proposing S.3325, entitled the “Enforcement of Intellectual Property Rights Act of 2008.” The bill, reflecting a compromise of several intellectual property proposals introduced during the current Congressional term, was approved by the Senate Judiciary Committee on September 11, 2008 by a vote of 14-4. Proponents of S.3325, such as the Recording Industry Association of America and the National Association of Manufacturers, say that the bill protects owners of copyrights and trademarks by providing the government with additional tools to enforce such intellectual property rights, and discourages potential violators of such rights from domestic and international acts of counterfeiting and piracy. Opponents argue that the bill requires unnecessary enforcement by the federal government of private rights that are already protected by civil remedies available to private parties, and that the penalties set forth in the bill are dangerously broad.

Currently, the Justice Department may only bring criminal charges against alleged copyright infringers. Criminal actions generally require that prosecutors satisfy a burden of proof beyond a reasonable doubt – the highest level of proof and the most difficult to satisfy. S.3325 would authorize the Attorney General to institute civil suits against any person who engages in conduct that constitutes a criminal offense under the copyright laws, provided that the copyrighted work is registered before bringing such a civil infringement suit. By expanding the available means of suit, the bill would ease the burden on federal prosecutors by requiring that only the preponderance of the evidence standard of proof be met.

In so far as shipment across the border is concerned, S.3325 would apply copyright and trademark law not only to imported infringing goods, as is currently the case, but also to exported infringing items and those items trans-shipped through the United States – not something which is within the scope of the current laws. The Justice Department would have the right to pursue action against domestic and international counterfeiters, a remedy which many smaller domestic owners of intellectual property lack the capacity to pursue.

Under the proposed bill, in cases involving trademark violations or use of counterfeit marks, courts would be authorized to enter judgment for three times profits earned by an infringer or damages suffered by a trademark owner, whichever is greater, in addition to attorneys’ fess, unless the courts find extenuating circumstances. The bill further doubles the statutory damages available in trademark counterfeiting cases to a range of $1000 to $200,000, and authorizes treble damages where a trademark violation involves: (1) intentional and knowing use of a counterfeit mark or designation in connection with the sale, offering for sale, or distribution of goods or services; or (2) providing goods or services for the commission of such violation, with the intention that the recipient would use the goods or services in committing such violation.

S.3325 would empower federal agents with the ability to seize and destroy equipment suspected of being used by an alleged infringer in committing copyright infringement activity as well as trademark counterfeiting activity. The bill would allow federal agents to confiscate equipment owned or predominantly controlled by an alleged infringer such as computers, servers and other devices used by alleged violators. Prior to seizing any equipment, the government would be required to show a “substantial connection” between seized property and the alleged infringing acts. Following seizure, however, such seized equipment must be destroyed or otherwise disposed of. Additionally, the bill increases the maximum statutory penalties for trafficking in counterfeit goods or services that endanger public health and safety, from 10 years imprisonment to 20 years for knowingly or recklessly causing bodily injury, and to life imprisonment for knowingly or recklessly causing or attempting to cause death.

An additional component of the bill provides for the creation of a new federal position called the Intellectual Property Enforcement Coordinator (IPEC). Appointed by the President to serve in the Executive Office of the President, the IPEC would work with various governmental agencies to develop a unified strategy to combat piracy and counterfeiting. The IPEC would oversee an “inter-agency advisory committee,” including, among others, the Department of Justice, the United States Patent and Trademark Office, the Department of State, the Department of Homeland Security and the Food and Drug Administration, to produce a joint strategic plan for domestic and international intellectual property law enforcement, coordinating anti-counterfeiting and anti-piracy activities, and having the ability to institute federal lawsuits on behalf of copyright holders.

Contemplating an increase in the amount of funding available to federal, state and local law enforcement, the bill would create a unit within the Federal Bureau of Investigation to fight intellectual property crimes, establish a Department of Justice Organized Crime Task Force for the study of organized crime related to the theft of intellectual property, and authorize funds for the FBI and DOJ to hire and train agents and prosecutors to investigate and prosecute intellectual property crimes. Further, a number of “intellectual property law enforcement coordinators” would be sent by the Attorney General to foreign countries in order to reduce counterfeit and pirated products in the United States market and protect domestic intellectual property rights by attempting to curtail the sources overseas.

Opposing public interest groups, such as Public Knowledge and the Electronic Frontier Foundation, have dubbed the bill as “an enormous gift” to copyright owners that would impede, rather than protect, progress in arts and sciences in the United States. A concern for them is that the IPEC would retain unnecessary and excessive authority, and since domestic owners of intellectual property already have the right to bring suit against infringers, there is no need to expend public resources to allow the government to enforce such rights. Such critics have pointed to the recording industry’s legal actions against thousands of individual consumers for intellectual property infringement as an example, and argue that S.3325 is the result of lobbying from powerful recording and movie industries, to the detriment of the ordinary consumer.

S.3325 is expected to be placed on the Senate calendar soon, to then be considered by the entire Senate. Several bills containing similar provisions have been proposed in recent years but without success, including one that passed the House in 2007, but which did not provide for the Justice Department’s ability to sue copyright infringers, though it did provide for anti-piracy task forces and an FBI piracy unit. It remains to be seen therefore whether such reform will be actually enacted, and whether provisions will be amended to ease public interest groups’ concerns.

For more information please contact Beni Surpin and Crystina Coats. Mr. Surpin is a partner in the Intellectual Property and Corporate Practice Groups in the firm's Del Mar Heights office. Ms. Coats is an associate in the Intellectual Property Litigation and Technology Transactions Practice Group in the Del Mar Heights office.

Cross-Border Transactions: Notable Differences in Due Diligence

Sheppard Mullin — Thu, 23 Oct 2008 10:49:07 -0800

By Jerry Gumpel, Jeralin Cardoso and Larissa Calva-Ruiz

Introduction:

The type of transaction and the purpose behind the transaction will largely shape the focus of the due diligence process. Due diligence is about uncovering hidden risks and reducing further exposure. Whether the transaction involves the sale of a company or the purchase of assets, it is imperative to determine what you, as the Purchaser, are seeking to get out of the deal and to structure the due diligence review in a manner that will further such goal. The location of the company or the assets being purchased will also impact the due diligence process by determining which laws will govern your review.

As the number of transactions between American and Mexican companies continues to grow it is important to recognize that the legal systems in both countries are decidedly different and the due diligence list will vary depending on the location of the company and/or the assets. Therefore, to ensure a successful international transaction the differences between conducting due diligence in the United States and in Mexico should be acknowledged. This article highlights a few of those differences.

General Corporate Governance and Compliance:

Companies in Mexico

The incorporation of an entity in Mexico, the granting of general powers of attorney, the appointment of members of the board of directors, mergers, and the creation and elimination of liens, are some of the corporate acts that must be recorded before the Mexican Public Registry of Property and Commerce (the “Public Registry”) in order for the acts to be valid or to be recognized by third parties. As such, it is necessary to confirm with the Public Registry that the company has recorded all relevant acts. The failure to register these corporate acts may bring about serious complications to the company or the assets for the Purchaser.

Various corporate documents and acts of a Mexican company often require formalization before a Notary Public in Mexico. Some of the corporate acts that need to be formalized before a Notary Public include the incorporation of an entity, any amendments to the entity’s bylaws, the merger or split of an entity, as well as the appointments and resignations of members of the board of administration. Several of these acts may also require registration before the Public Registry in order for the act to be effective before third parties.

Companies in the United States

In the United States, companies are required to file their organizational documents, any amendments thereto, and record merger transactions, in their state of incorporation. Besides complying with the filing and reporting requirements of the state in which the company is incorporated, American companies must also apply for qualification to do business in any other states where it has substantial ties and/or it transacts business. Failure to properly qualify to do business in a particular state or to pay the appropriate taxes and fees imposed by that state can cause the company to lose its standing to conduct business in a particular jurisdiction. As such, it is necessary to confirm, with the appropriate state agencies, that the company is properly qualified to do business in the various states, where applicable, and that all fees and taxes have been paid in a timely manner. The failure to be properly qualified may be rectified by reapplying for qualification and/or paying any unpaid fees. The liability that may result from failure to pay appropriate fees can range from minor to quite substantial so it is important that the Purchaser investigate the company’s standing in each relevant jurisdiction prior to closing.

Unlike its Mexican counterparts, most corporate acts by an American company do not need to be presented before a Notary Public. It is often sufficient for the act to be authorized by the board of directors and recorded in the internal corporate minutes. Sometimes, a more formal process is required in which an officer of the company must certify through a signed declaration that the documents in question are correct. As a result, when reviewing the due diligence materials for an American company it is important to review the internal corporate records and minutes to ensure that the actions taken by any agent were properly authorized.

Foreign Investment in Mexico

In Mexico, the Ministry of Economy through the Mexican Foreign Investment Registry (the “Foreign Investment Registry”) is in charge of maintaining a record of the foreign investment flow that comes into the country. During the due diligence process of a Mexican entity, it is extremely important to confirm whether the company is registered with and up-to-date before the Foreign Investment Registry, if applicable. Failure to properly register with the Foreign Investment Registry and/or failure to file the relevant documents within the legal timeframe (such as trimester reports or annual economic reports) may result in penalties. Although these infractions do not impose major consequences for the company and are relatively easy to fix, they do impose a payment of what can be considerable economic sanctions.

Securities Compliance in the United States

All sales or offers of securities in an American company are required to be registered with the Securities and Exchange Commission (the “SEC”) unless there is an exception or exemption for that particular offering. In many cases, the company will qualify for an exception or exemption but certain actions must have been taken in order to rely on such exemption and in some cases documents may still need to be filed with the SEC. Therefore, if the transaction involves the purchase of an American company it is important to review the history of the sale of securities to ensure that all securities laws and exemptions have been properly applied. State securities laws may also be implicated based on where the security was sold and where the investor resided at the time of the transaction.

Labor Issues

In Mexico

Labor laws in Mexico tend to impose obligations towards the employer that consist of the payment of fees/contributions for the benefit of the employees; many of these fees are not contemplated in the United States.

When purchasing a Mexican company that maintains employees in Mexico, the company must be registered as an employer before the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social, or IMSS), the Mexican Institute for Workers’ Housing (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, or INFONAVIT), and the Workers’ Retirement Fund (Sistema de Ahorro para el Retiro, or SAR), and pay the corresponding contributions in favor of their employees pursuant to the applicable law. The nonpayment of contributions to such funds will result in the employer paying various fines imposed by the authorities (including tax fines), as well as expose the employer to the risk of having a lawsuit filed against it by its employees. Another aspect to be reviewed is the payment of employee participation in the company's profits during the fiscal year, which is contemplated by Mexican law. Finally, any collective bargaining agreements executed between the employer and workers' unions must also be evaluated to avoid future conflicts.

In the United States

Employers in the United States must comply with both state and federal labor laws. If a company retains employees in several states, each state’s labor laws will need to be reviewed to ensure compliance.

When determining compliance with state labor laws, it is important to review (1) the various termination notice requirements, (2) mandatory severance obligations, and (3) any state overtime pay regulations, that could be triggered by the transaction. Under federal labor laws, employment eligibility and proper employment classification will also need to be reviewed. American companies are required to verify employment eligibility within three days of an employee’s start date. This verification is done by submitting an I-9 Form. The failure to submit an I-9 Form, to properly complete an I-9 Form, and/or to maintain a current I-9 Form for the required length of time can result in civil penalties. Misclassification of an employee as an independent contractor can also result in penalties for the employer, including fines, back taxes, back wages issuing employee benefits retroactively.

Another issue that is prevalent under both state and federal labor laws, is the Worker Adjustment and Retaining Notification Act (“WARN Act”) and its state counterparts. The federal WARN Act may be triggered if there is a plant closing or mass layoffs thereby imposing notification requirements on the company. Compliance with the federal WARN Act does not protect a company from a state WARN Act violation. Under California law, for example, the state WARN Act may be triggered even if the Purchaser retains all the employees after closing but the duties, work schedule, pay, and benefits of the employees are not substantially similar to those before the sale. Not all companies are subject to the federal WARN Act and/or the state equivalent but the criteria threshold should be reviewed to determine if the company is subject to compliance and if the contemplated transaction is likely to trigger a WARN Act issue the parties should consider addressing the allocation of damages in the event of a violation prior to closing.

Tax Issues

One of the most important areas to review during the due diligence process, whether the target involves an American or Mexican company, are the tax issues the company may be subject to, whether it be tax regulations imposed on the company or the tax consequences of the contemplated transaction. In any case, tax matters should be carefully reviewed at the beginning of the due diligence process as the tax implications can effect the structure and ultimate outcome of a transaction.

With regard to a Mexican company, the first matter that should be checked is the company’s registration before the Federal Tax Payer Registry. Mexican companies are also required to keep an After-Tax Earnings Account (Cuenta de Utilidad Fiscal Neta, or CUFIN), a Capital Contributions Account (Cuenta de Capital de Aportación, or CUCA) and previously, a Reinvested After-Tax Earnings Account (Cuenta de Utilidad Fiscal Neta Reinvertida, or CUFINRE); this last account was only required from the years 1999 to 2001 and companies currently do not generate a balance in CUFINRE. However, there is always the possibility that the company that is being purchased has a pending balance in the referred account. Distributions of dividends, mergers and any decrease in the corporate capital of a company have an impact in the accounts mentioned above. For this reason, any merger, distribution of dividends or change in the corporate capital of the company must be carefully analyzed during the due diligence process for any potential tax liability.

Conclusion

The issues discussed in this article are only a small sample of the general differences between the due diligence items to be reviewed in the United States and in Mexico. The type of transaction and the particular facts and circumstances involved in a deal will largely affect the focus of your due diligence review and the items that are uncovered may effect how the transaction is inevitably structured. As a result, it is of great importance to be aware of the current laws and regulations governing a particular transaction and to protect your client in any cross border transaction he/she chooses to enter into.

For more information please contact Jerry Gumpel, Jeralin Cardoso or Larissa Calva-Ruiz. Jerry Gumpel is a partner in the Corporate and Securities Practice Group in the firm's Del Mar office. Jeralin Cardoso is a associate in the Corporate and Securities Practice Group in the firm's Del Mar office. Larissa Calva-Ruiz is an foreign associate in the Business Trials Practice Group in the firm's Orange County office.