International Business Law Advisor

UK Investors Offered Amnesty Under Liechtenstein Tax Deal

Santiago Cueto — Sat, 06 Mar 2010 23:44:53 -0500

In a trend that could spread to other jurisdictions, Liechtenstein is asking wealthy UK investors who have assets hidden abroad to take advantage of its “unique and attractive” amnesty program.

The agreement reached between the UK and Liechtenstein combines generous terms with a promise by the principality to close the accounts of customers who could not prove they were tax-compliant. The disclosure facility offers minimal penalties, a guarantee of no prosecution in non-criminal cases and an exemption from the threat of “naming and shaming”.

You can read about the program in the Financial Times article Liechtenstein woos investors with tax amnesty.

While I think the deal comes close to striking a balance between banking confidentiality and tax transparency, it comes at the expense of rewarding the users of the most secretive jurisdictions.

Trend to Watch: Look for Similar Deals to Be Forged with Monaco, Singapore, Hong Kong and Gibraltar

-Santiago

How to Authenticate Documents for Use Abroad Under the Hague Legalization Convention

Santiago Cueto — Tue, 02 Mar 2010 11:29:45 -0500

I recently represented an overseas client who sued a U.S. party based on a transaction that took place overseas. The transaction centered on several key affidavits, powers of attorney and attestations that we would need to use in U.S. litigation.

Traditionally, for such documents to be made admissible in U.S. courts, the documents must have been authenticated or “legalized’ by the U.S. embassy or consulate in the country in which the documents originated. And before authentication is possible, the document must have been certified by the foreign ministry of the country of origin.

Folks, the red tape involved can be a real headache and extremely time consuming. This is not what your clients want to hear.

Hague Convention Gives VIP Status to Documents to Be Used Abroad

Fortunately, there’s the Hague Legalization Convention to streamline the authentication of documents for use abroad. The Convention is a multilateral treaty designed to cut through the traditional certification process by relying solely on the convention “apostille.”

The apostille gives any public document VIP status for acceptance into any country that is a party to the Convention. Currently, 98 countries have signed on to the Convention. As one commenter, correctly pointed out--be sure to verify that the target country (ies) are signatories to the Convention before assuming otherwise. You can check here.

U.S. Origin Documents for Use Abroad

In the U.S., all states have authorized their respective Secretaries of State to sign Hague Convention apostilles. Also, the clerk of each federal court has been empowered to issue apostilles for documents originating in that court or contained in the records of cases before that court. Documents originating in state courts are subject to certification by the court clerk and issuance of a convention apostille by the secretary of state.

When you request the apostille, be sure to specify in which country the document is to be used. Once the apostille is issued, it’s ready to be used abroad.

Foreign Documents for Use in the U.S.

To be admissible in the U.S., documents from other countries that are parties to the Convention and the prior certifications of those documents need only be covered by a completed apostille issued by the official of the country of origin. That’s all that is generally required.

The documents certified by apostille do not require legalization by the U.S. embassy or a U.S. consulate in the country where the country originated.

It’s that easy!

What has been your experience with authenticating documents under the Convention?

-Santiago

How to Protect Your Intellectual Property and Avoid Outsourcing Pitfalls

Santiago Cueto — Tue, 23 Feb 2010 23:55:22 -0500

Define. Scrutinize. Monitor.

About 11 years ago my firm was retained by a large computer company to file a claim against an Original Equipment Manufacturer (OEM) based in Taiwan for theft of trade secrets. Our client had retained the OEM to manufacture what was then the first “all-in-one” motherboard. I’ll spare you the technical details but this technology was revolutionary.

The OEM was no dummy—it quickly identified the potential market for the technology. It subsequently went behind my client’s back and began selling the computers into other distribution channels under its own private label.

The OEM simply affixed its own label, “Brand X,” on top of my client’s equipment and passed it off as its own. The theft was ultimately uncovered at a trade show in Las Vegas several months later. One of my client’s engineers happened to stop by a booth displaying some interesting technology-- a very familiar looking motherboard..

Upon closer inspection of the circuitry, it was discovered that the motherboard was exactly the same one that the engineer had designed 10 months earlier and outsourced to the shady OEM.

Upon learning of the trade theft, we immediately filed suit in federal court. An extensive 5-year international legal battle ensued culminating in a 2 month long federal trial in which we ultimately prevailed.

I tell you this story as a cautionary tale on how important it is to make sure all details of your clients’ outsourcing endeavors are closely defined, scrutinized and monitored.

The incomparable China Law Blog has a “not-to-be-missed” post on outsourcing appropriately titled China Outsourcing 101. The Legal Basics. While the post deals exclusively with China, I think it’s applicable when dealing with any OEM. My friend Dan Harris lists five outsourcing basics including the need for trademark registration and non disclosure agreements:

1. Create and properly register your intellectual property rights in the United States or whatever country or countries in which you sell the bulk of your products. If you do not have a firm basis for your IP rights under U.S. law, you will have nothing to protect in China. Before you go to China, be sure your intellectual property is protected under U.S. law or the laws of whatever country or countries in which you sell your products. Protect your brand identity by creating and registering your trademark, slogan and/or logo. Register your important copyrights. Carefully identify and protect your trade secrets, proprietary information and know how. Patent what you can.

Doing the above will mean that no matter what happens in China, you will at least be able to protect your product to the fullest extent possible in the country or countries in which you sell your products.

2. Register your trademarks in China. Registration can protect your future access to the Chinese market, prevent the export of counterfeit goods from China, and prevent a competitor from registering your mark in China, which would prohibit you from exporting your own product from China. For more on the necessity of registering your trademark in China, check out, "WHEN To Register Your China Trademark" and "China Trademarks -- Do You Feel Lucky? Do You?"

3. Use a written agreement to protect your know how and trade secrets in China. Small and medium sized companies usually do not have an extensive portfolio of patents. Their most valuable intangible assets typically are their know-how and their trade secrets, which cannot be protected by formal registration. Chinese law, however, permits companies to contractually protect their know how and trade secrets by contract. Such agreements may (and in most cases should) also address issues such as non-competition and confidentiality. Without such a written agreement, no such protection is available. For more on using non disclosure agreements (NDA) in China, check out, "China Non Disclosure Agreements (NDA). A Really Good Thing."

4. Product Quality and Payment Terms. The rule here is simple. Do not make final payment to your Chinese manufacturer until you are confident you will be getting an on time shipment of the correct items and quantities at the quality standards you require. This usually means you must incur inspection costs in China and provide for a clear procedure for dealing with these problems as they arise. You must take the lead on this. You cannot depend on the OEM manufacturer to do this for you.

5. Use comprehensive OEM Agreements with each manufacturer. Small and medium sized businesses often enter into OEM manufacturing transactions with a simple purchase order. This is a mistake. The purchase order will not protect you. Your protection depends on your securing a signed written OEM manufacturing agreement with each Chinese manufacturer with which you deal. The ideal OEM agreement will address all of the issues discussed above while also addressing other basic legal issues such as jurisdiction and dispute resolution. This agreement should be in both Chinese and English, since the Chinese language version will control in China. For more on this, check out, "China OEM Agreements. Why Ours Are In Chinese. Flat Out."

I agree with all these points but would add where applicable drafting specifically tailored Technology Transfer Agreements where the OEM is also granted a license to market and sell the product within predefined parameters.

These agreements set forth exactly what a licensee is free to do under the patent rights. Depending on the claims in the patents, the licensee can be given the right to manufacture, have manufactured, use and/or sell the subject matter of the license. The agreements often set forth terms of exclusivity depending on the territorial rights granted.

The agreement should also state that the licensor owns the subject technology of the license (patents, patent applications, know-how trade secrets, trade marks and / or copyrights ), that it has the right to grant the license and that it has not granted a previous conflicting license.

What other precautions would you take when dealing with OEMs?

-Santiago

7 Steps to Effectuate International Service of Process under the Hague Service Convention.

Santiago Cueto — Fri, 19 Feb 2010 14:54:38 -0500

Given the international focus of my practice, I regularly serve process on parties located in foreign jurisdictions. Most of the time it's straightforward because many of the countries I deal with are signatories to the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, more commonly called the Hague Service Convention.

The Hague Service Convention is a multilateral accord that allows service of judicial documents from one signatory state to another without recourse to consular and diplomatic channels.

Contracting States include the United States, China, the United Kingdom, Japan, South Korea, India, Canada and France, as well as a number of other European countries. And just a few months ago, Australia signed onto the Convention.

The Convention greatly simplifies the service of court documents on persons and companies located overseas in civil or commercial matters. While the available avenues of service under the convention in any particular case depend on the reservations and service rules of the destination state (conveniently provided here), the steps below are applicable to most contracting parties.

It's important to remember that under Rule 4(f)(1) of the Federal Rules of Civil Procedure, U.S. litigants are required to resort to the mechanism set forth in the Convention if service is to be made in any of the 61 signatory states.

Fortunately, effectuating service of process under the convention is refreshingly straightforward:

1. Download Form USM-94: All parties are required to use the "Request for Service" (form USM-94) provided by the U.S. Marshall’s Service.

2. Locate the Address of the Central Authority. The address and complete contact details for all central authorities can be found here.

3. List Applicant’s Name and Address. The attorney representing the person seeking service should execute the portion of Form USM-94 marked "Identity and Address of the Applicant." In addition to the name and address of applicant, be sure to include a telephone and fax number.

4. Cite the relevant Statutory Authority: Most foreign central authorities know that private U.S. lawyers are generally authorized by U.S. law to effect service, and that Article 3 of the Convention permits counsel to complete the Convention request forms.

Nevertheless, some foreign central authorities continue to reject requests completed by attorneys unless the request form cites the specific U.S. or state law authorizing attorneys to serve process.

The best way to deal with this is to make sure that the statutory authority to serve the document appears prominently on the request form (note there is no designated space for this), stating that "service is requested pursuant to Rule 4(c)(2), U.S. Federal Rules of Civil Procedure" which authorizes any person who is not a party and is not less than 18 years of age to serve a summons and complaint.

Requests for service in matters pending in state courts should specify that the request is made pursuant to Rule 4(c)(2) of the U.S. Federal Rules of Civil Procedure and any pertinent state law.

5. Signature and Date (Page 1): Sign and date the signature block on the Request form. Do not complete the Certificate on Page 2 of the USM-94. This is the proof of service which will be completed by the relevant central authority after service is effected.

6. Provide Summary of the Document to be Served (Page 3): The applicant must also complete this part of the USM-94 and identify the documents to be served. e.g. Complaint for Damages, Petition for Injunctive Relief etc.

7. Send the Request: The completed request form and documents to be served and accompanying translation of the documents to be served, in duplicate (one original, one copy), should be mailed directly to the foreign central authority as provided by Article 3. No translation of the form itself is required.

That’s it!

Here are some additional practice pointers to keep in mind:

Time Frame

The Convention does not impose an obligatory time frame. Most countries take 30-90 days to effect service. Article 15, second full paragraph, sub-para (b) implies that the maximum time frame is 6 months.

Country Specific Issues

In the United States, an attorney for a party is designated by statute as a "Judicial Officer" and thus can send a service request directly to the "Central Authority" in the foreign state. However, it is important to see whether other countries will accept a direct request from a foreign attorney. Some countries, such as Israel, will not honor a service request unless it is executed by a judge or clerk of the requesting court.

France and Italy permit incoming service on their residents directly by mail. By contrast, Germany and Switzerland and most current or former communist countries require incoming service to be effected exclusively through their Central Authorities.

Other methods of service

In addition to the method set out above, the Service Convention allows a number of other methods for service. Where the State in which the document is to be served allows, documents can be transmitted: a) by posting the documents directly to the person to be served; b) through consular or diplomatic channels; or c) by sending the documents directly to a person authorized to serve the documents in the foreign State. Note that Fed. R. Civ. P. 4(f)(1) authorizes use of these alternatives where the receiving state has not objected.

Conclusion

The Hague Service Convention greatly simplifies and enhance the process for serving court documents in foreign jurisdictions. The framework provided for service in Contracting States is quicker and more cost-effective than the current methods used.

Once you've secured service of process on a foreign party, the next step is to gather all necessary evidence. That will be the subject of an upcoming post dealing with the Hague Convention on Taking Evidence Abroad in Civil or Commercial Matters.

-Santiago

Doing Business in Japan Teleconference. $768.8 Billion Reasons to Attend

Santiago Cueto — Thu, 18 Feb 2010 21:49:05 -0500

The International Law Prof Blog has passed along details about an upcoming teleconference, “Doing Business with Japan,” sponsored by the American Bar Association Section of International Law.

The conference could not come at a better time. Businessweek’s Daniel Kruger reported this week that Japan has overtaken China as the largest foreign holder of U.S. Treasury securities. The number is staggering--Japan is now holding $768.8 Billion in U.S. T-Bills.

Folks, the conference is a great first step towards bridging the trade gap and getting back some of those T-Bills.

Here are the details:

90-Minute ABA Teleconference on Doing Business with Japan

Are you interested in getting a better understanding of the legal system in Japan? Or in the advantages (and dangers) of selecting Japanese law or Japan as a place to arbitrate? Or other issues relating to doing business with (and in) Asia?

There's a teleconference on "Doing Business with Japan" on Wednesday, February 24, 2010 from noon to 1:30 p.m. Eastern US Time. The program is organized by the Asia/Pacific Committee of the American Bar Association Section of International Law. Click here for the program description, speaker bios, and registration form. Download Japan. There is an extremely modest fee to call in ($15 for section members and $25 for non-members). Register by Monday, February 22, 2010.

Looks like an excellent program. Will you be attending?

-Santiago

The International Business Law Advsior Goes to Washington to Lobby for Global Warming Legislation--or is it "Global Weirding?"

Santiago Cueto — Wed, 17 Feb 2010 17:13:18 -0500

I traveled to Washington D.C. a few weeks ago and spent several whirlwind days on Capitol Hill meeting with an assortment of Cabinet Members, Senators and Congressmen on pending climate change legislation. Thanks to climate and energy advocate extraordinaire Susan Glickman for putting the trip together,

Before anyone says anything--the irony of the snow falling on me as I made my way up the Capitol steps did not escape me.

My involvement with the pending climate change bill stems from an innovative program my firm launched to accept carbon offset credits as partial payment for legal fees. Our firm’s program was the subject of a Wall Street Journal article, which you can read about here.

While others may not follow my lead, that's quite all right—I'm beholden to a much higher authority: my 15 month-old daughter.

Although the meetings went smoothly, it appears less likely that the pending legislation will make it to vote this year. But I’m glad to see that interest in this heated debate only continues to build.

Famed internationalist and New York Times columnist Thomas Friedman wrote a proactive op-ed piece on the subject today.

In the article, Global Weirding is Here, Mr. Friedman proposes, among other thins, that we abandon use of the term “Global Warming” and adopt the term “Global Weirding.”

I’ll allow Mr. Friedman to explain:

Avoid the term “global warming.” I prefer the term “global weirding,” because that is what actually happens as global temperatures rise and the climate changes. The weather gets weird. The hots are expected to get hotter, the wets wetter, the dries drier and the most violent storms more numerous.

The fact that it has snowed like crazy in Washington — while it has rained at the Winter Olympics in Canada, while Australia is having a record 13-year drought — is right in line with what every major study on climate change predicts: The weather will get weird; some areas will get more precipitation than ever; others will become drier than ever.

More importantly, Mr. Friedman also proposes that, wherever you sit on the issue, population growth alone will be reason enough to demand renewable energy and clean water. He also points out how China is way ahead of the game:

Even if climate change proves less catastrophic than some fear, in a world that is forecast to grow from 6.7 billion to 9.2 billion people between now and 2050, more and more of whom will live like Americans, demand for renewable energy and clean water is going to soar. It is obviously going to be the next great global industry.

China, of course, understands that, which is why it is investing heavily in clean-tech, efficiency and high-speed rail. It sees the future trends and is betting on them. Indeed, I suspect China is quietly laughing at us right now. And Iran, Russia, Venezuela and the whole OPEC gang are high-fiving each other. Nothing better serves their interests than to see Americans becoming confused about climate change, and, therefore, less inclined to move toward clean-tech and, therefore, more certain to remain addicted to oil.

These are valid points. What are your thoughts on the issue?

Leave a comment below and let's get this issue rolling.

-Santiago

Are You Sure Your China Business Operations Do Not ViolateThe Foreign Corrupt Practices Act ? Don't Be an Unwitting FCPA Violator

Santiago Cueto — Mon, 15 Feb 2010 23:54:56 -0500

Its incredible how every business discussion these days centers on China. While the U.S. and Europe struggle to get things moving, China continues to dominate the world's leading economic indicators. GNP. check. GDP. check. FDI. check.

As more U.S. companies shift production to China, competitive forces have upped the ante for businesses to deliver the best price points. Because of the hyper-competitive nature of Chinese sourced products, some companies either unwittingly or by choice engage in some questionable business maneuvering to gain even the slightest of price advantages.

Now more than ever U.S. enforcement agencies are keeping a vigilant eye on these suspicious business practices. Fun fact: The Department of Justice and Securities and Exchange Commission set a record in 2009 by bringing more FCPA prosecutions than in any prior year in the FCPA’s history. It looks like 2010 is going to be even busier for these folks.

A short but thorough overview of the FCPA as applied to China was recently published in BusinessForum China. The article is a good read for anyone with business activities in China. One point discussed in the article concerns the application of vicarious liability. This is where most U.S. companies run into trouble with the FCPA, so its important to consider the implications carefully:

U.S. authorities regularly apply vicarious liability theories to hold parents liable for the misconduct of their subsidiaries and agents. Not surprisingly, MNCs subject to the FCPA often unwittingly incur FCPA liability through the misconduct of their Chinese subsidiariesand agents, without ever operating in China themselves. Although non-US subsidiaries, including Chinese subsidiaries,are usually not directly subject to the FCPA, if the parent is a US corporation or issues US securities, and authorised the subsidiary’s illegal acts, the parent may incur liability. In one notable example, a US corporation agreed to pay a total of USD 22 million in FCPA penalties for, among other things, allegedly using its subsidiary to process payments to agents and Chinese officials associated with SOEs.

According to US authorities, even if the parent corporation does not explicitly authorise the illegal acts by the subsidiary, the parent may nonetheless incur liability if it was aware of and failed to stop the illegal acts (which may constitute implicit authorisation); if it acted with “wilful blindness” (being aware of a high probability that a bribe will be paid and taking steps to avoid learning that fact); or if it discovered the illegal acts after the fact and then accepted monetary benefits arising from such acts. Nor can the parent escape liability simply because it is a minority shareholder in a Sino-Foreign joint venture. If the parent corporation cannot control the actions of the joint venture, it is still obligated to object to illegal acts, take reasonable actions to prevent the joint venture from continuing future criminal activity, and refuse benefits arising from the same.

Because vicarious liability is the easiest way for a U.S. company to unwittingly trigger an FCPA investigation, it's critical to keep track of what's going on in the supply chains, particularly when one or more subs or agents are involved.

The way companies have handled this varies. Some use auditors in the host country and others send reps to oversee the whole thing.

How does your company handle this?

Trend to Watch: Look for 2010 to Be Another Record Year for FCPA Enforcement Actions.

-Santiago

Official World Holidays for 2010 (Cajun Nation Included)

Santiago Cueto — Thu, 11 Feb 2010 09:53:12 -0500

Because my international practice involves working with folks all over the world, I keep a keen eye on world holidays and do my best to schedule my work around them. This is one of the best ways I can show my respect for other cultures.

The folks overseas always appreciate the extra attention to detail and you will be amazed how far this will take you in building long term relationships.

There are several big holidays coming up in the next several weeks that will temporarily slow or even halt the business activities of several countries. The two biggest holidays take place in China and Brazil. China celebrates its New Year next week and Brazil Celebrates Carnival the week of February 22.

For other international holidays be sure to download the 2010 World Holidays Guide. The guide lists the main holidays of over 43 countries. I’m not sure why Brazil and India were not listed but here they are:

Brazil

January 1 - New Year's Day
February 26-27 - Carnaval
February 28 - Ash Wednesday
April 13* - Good Friday
April 21 - Tiradentes Day
May 1 - Labor Day
May 13 - Ascension Day
June 14* - Corpus Christi
September 7 - Independence Day
October 12 - Our Lady of Aparecida
November 2 - All Souls' Day
November 15 - Proclamation of the Republic
December 25 - Christmas

India

January 26 - Republic Day.
February 12 - Mahashivratri.
February 26 - Milad-Un-Nabi
March 28 - Mahavir Jayanthi.
April 2 - Good Friday.
Aprril 5 - Easter Monday.
April 28 - Buddha Purnima.
August 15 - Independence Day.
September 2 - Janmashtami.
September 10-11 - Id ul Fitr (End of Ramadan).
October 2 - Mahatma Gandhi's Birthday.
October 17 - Dussehra (Vijaya Dashami).
November 2 Guru Nanak's Birthday.
November 5 Deepavali or Diwali (Festival of Lights).
November 16- 17 - 17 Idu'l Zuha/Bakrid (Feast of the Sacrifice).
December 7 Muharram (Islamic New Year).
December 25 Christmas Day.
December 26 Boxing Day.

*Cajun Nation

February 7-28 - Super Bowl celebration and Mardi Gras

*With so much going on, New Orleans might as well be a sovereign nation for the moment. Don't event think about getting anything done there in the next few weeks. With the Saints' Super Bowl victory and Mardi Gras, February will be a month-long holiday for these folks.

-Santiago

The Ultimate Hidden Fee: U.S. Based Multinational Companies Face $122 Billion Tax Burden Under Proposed Bill

Santiago Cueto — Thu, 04 Feb 2010 16:03:50 -0500

And Why Relocating to Switzerland May be the Best Corporate Strategy

There’s nothing more annoying than finding hidden fees buried deep inside obtuse and mangled contract language. The only thing worse than finding hidden fees is learning about these punishing provisions from someone else—after you’ve signed the agreement.

If you thought hidden fees provisions were the exclusive craft of credit card and cable companies, I’ve got bad news. The biggest offender just might be the drafters of the proposed federal budget making its way through Congress.

International Tax Increase Buried in Proposed Bill

Thanks to the keen eyes of the Wall Street Journal’s Matthew Slaughter, U.S. based Multinationals have a chance to lobby against what may be the largest hidden fee--an obscure tax provision--ever levied against them. Matthew writes in the article “How to Destroy American Jobs:”

Deep in the president's budget released Monday—in Table S-8 on page 161—appear a set of proposals headed "Reform U.S. International Tax System." If these proposals are enacted, U.S.-based multinational firms will face $122.2 billion in tax increases over the next decade. This is a natural follow-up to President Obama's sweeping plan announced last May entitled "Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas."

A proposed $122 Billion international tax burden? Placed on pg. 161? On a chart? Apart from the obvious lesson to carefully scrutinize the details of everything, and I do mean e.v.e.r.y.t.h.i.n.g., that comes across your desk, the substantive point of the article is absolutely correct—the proposed tax hike on U.S. based MNCs will bankrupt those that earn a significant amount of their revenue overseas.

Proposed Tax Will Force US-based MNCs to Relocate Overseas

As one commenter noted, it is the fiduciary responsibility of the board of a company to protect the investors in that company, and to provide them with the maximum safe return on their investment. In the new tax and regulatory environment the U.S. is in the process of imposing, any company that earns a large percentage of their revenues outside of the US simply cannot remain U.S. based.

Under the proposed tax hike on U.S. based MNCs, what incentive is there for Coca-Cola to remain a US based multinational? Why not move the corporation to Switzerland, where the favorable corporate tax structure has long been lured the operations of large MNCs such as Johnson & Johnson and Burger King Holdings Inc.

Switzerland Offers Optimal Tax Environment for MNCs

The timing could not be better for companies looking to relocate their operations overseas-- and to Switzerland in particular. The Wall Street Journal recently reported on an emerging trend among Swiss cantons to compete for the business of MNCs by lowering their corporate tax rates. In the article Switzerland’s States Compete on Tax Cuts, the cantons of Zug, Schaffhausen (just north of Zurich) and Lucerne have all cut their tax rates in a heated battle to lure more MNCs.

For U.S.-based MNC’s looking to dodge the proposed international tax bullet, Switzerland provides the most favorable corporate tax environment in which to relocate U.S. based operations.

Conclusion

According to KPMG’s Corporate and Indirect Tax Survey 2009, the current effective U.S. Corporate tax rate is 40%, while in Switzerland the effective tax rate is 21.2%--and considerably less in some cantons. Under the proposed bill, the tax gulf will only grow wider.

It will be interesting to see what happens with the proposed tax. Until then, MNCs should take a look at Switzerland.

Trend to Watch: If the Proposed International Tax is Enacted Look for an Exodus of U.S.-based MNCs to Switzerland and to Other Favorable Tax Climates.

--Santiago

Ch-Ch-Ch-Changes: SEC Switches Position and Issues Disclosure Guidance on Material Risks Impacting International Climate Change Accords.

Santiago Cueto — Fri, 29 Jan 2010 17:49:43 -0500

SEC Wants to Know: Is Your Carbon Footprint a "Material Risk" to International Climate Change Agreements?

Climate Change is a red hot area right now and is a top priority of discussion this week at the World Economic Forum in Davos, Switzerland.

It seems that everyone is throwing their hat into the ring in one way or another. Now the Securities and Exchange Commission has, rather surprisingly, entered the climate change picture.

In an unprecedented move, the SEC issued a directive that companies should warn investors of global-warming risks.The SEC directive is the first economy-wide climate risk disclosure advisory in the world.

This change of face marks a complete turnaround for the commission, whose former Chairman Christopher Cox refused to address investor concerns regarding climate risk disclosure. Under the stewardship of SEC's current chairwoman, Mary Schapiro, the commission has made climate change a high priority. For international business this is a big deal.

The SEC issued a press released entitled “SEC Issues Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change” that lays out some of these potential impacts and what it means for disclosure. Among the areas highlighted by the SEC release:

Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.

Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.

Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

The SEC’s involvement in climate change regulation drives the federal government deeper into the climate debate, potentially reshaping management decisions at companies across the country and the world.

What do I think? I think it’s about time that international environmental issues are put on the national agenda. This is also good for investors. This paves the way for the development of a consistent standard for companies to report climate risk that will help all investors make better-informed decisions.

Trend to Watch: Look for Securities Regulators in Other Nations to Issue their Own Climate Change Directives in the Very Near Future

7 Ways to Bulletproof Your International Arbitration Agreement

Santiago Cueto — Tue, 26 Jan 2010 16:43:18 -0500

As an international business attorney, a focal point of my practice involves advising clients how to best handle cross-border disputes. The most effective mechanism by far in resolving international dispute is international arbitration. Why? International arbitration levels the playing field by taking away the home court advantage of parties on either side of a transaction.

But the most attractive aspect of arbitration is that the awards issued by an international arbitration tribunal will receive worldwide recognition by countries that are members of one of the international conventions on the enforcement of tribunal awards.

Given the superior advantages arbitration has over litigation in resolving international disputes, it’s essential that you make the international arbitration agreement ironclad and bullet proof.

Here’s how to do it:

1. Be Unambiguous.

Unequivocally state that any dispute will be resolved through arbitration e.g. “Any dispute or difference arising out of or relating to this agreement shall be finally resolved by arbitration …”

2. Be Clear

Define whether arbitration is to be preceded by negotiation or mediation and designate a timeframe e.g. “If no agreement has been reached within __ days of the delivery of written notice of the existence of a dispute, either party may serve a request for arbitration …”.

3. Be Specific

Specify the administering institution and the rules to be applied e.g. “The arbitration shall be administered by the International Center for Dispute Resolution in accordance with its International Arbitration Rules

4. Be Careful

Carefully select the site of the arbitration taking into consideration the quality of its arbitration jurisprudence and the respect of its courts for the arbitral process. e.g. China, no. Hong Kong, yes.

5. Be Meticulous

Meticulously set forth the number of arbitrators on the panel and how they will be selected. Choose an arbitrator who demonstrates communicative proficiency, a firm appreciation of the rules of evidence and an acknowledged expertise in the industry in which the dispute arose or about the issues in dispute.

6. Be Heard.

Designate the language of the proceeding. It is unsettling how many times parties overlook this provision and are forced to rely on a foreign translator to communicate every word of the proceeding.

7. Be Final

In order to prevent further review and appeals of an arbitral award once it is rendered, you must include a statement in the arbitration agreement that clearly states that the award is final e.g. “The arbitral award is binding, final, not subject to review, and not subject to appeal by the courts in any jurisdiction." This provision is particularly essential in jurisdictions where the laws allow parties to appeal an award issued in that country.

Follow the points I described above, and you’ll be well on your way to drafting a bullet proof international arbitration agreement.

-Santiago

The BRICfast Club: A Series of Posts Dedicated to Brazil, Russia, India and China (Part I)

Santiago Cueto — Mon, 25 Jan 2010 15:49:56 -0500

Hey Brazil--Take Your Time With Those BITs, I Can Get Them Somewhere Else!

Today we’re launching the first in a series of posts on the BRIC countries in a fast, quick read format. While the late John Hughes would have appreciated the titular tribute to his Breakfast Club classic, the series is meant to stimulate a robust discussion among those interested in the subject.

For the uninitiated, BRIC is an acronym coined by Goldman Sachs to refer to the red-hot economies of Brazil, Russia, India and China. According to the investment group’s projections, the BRIC countries could become among the four most dominant economies by the year 2050. Let’s get things started with Brazil.

Our first topic picks up on an article I wrote Hey Brazil: It's Time to Ratify Those Bilateral Investment Agreements. The article centered on Brazil’s reluctance to enter into any Bilateral Investment Treaties (BITs). I promised I’d follow-up with a post on how to do business with Brazil and still enjoy the benefits of a BIT.

But Brazil does not have a BIT, you say?

Fortunately, Brazilian investors do not have to wait for changes in government policy to get the benefit of BITs. Investors can seek to structure their Brazilian investments to take advantage of the protection of BITs between other states.

Here’s how:

Establish a subsidiary in another Country. In many cases, a Brazilian investor can establish a subsidiary in a country that has a BIT with the host state through which to channel investments. Some BITs require only that the investor be established or incorporated in the home jurisdiction in order to acquire the protection of the BIT.

Here’s an Example:

Nationalization of Bolivian Energy Industry. When Bolivia took steps to nationalize the energy industry, Brazilian gas company Petrobras considered bringing investment claims against Bolivia for treaty violations by invoking the rights of its subsidiaries in Argentina and the Netherlands. Unlike Brazil, both Argentina and the Netherlands have BITs with Bolivia.

Conclusion

Brazil is increasingly emerging as a global leader and expanding its investment abroad. Brazilian Investors should take full advantage of BITs by establishing a subsidiary in another country. Doing so will ensure that their investments are protected.

Trend to Watch: A Surge in Investment Activity in Brazil Will Ultimately Lead to the Adoption of International Investment Agreements

-Santiago

The Great Firewall of China: How Lessons from the Apartheid Era Can Lift the Information Curtain

Santiago Cueto — Fri, 22 Jan 2010 15:42:01 -0500

Corporate Codes of Conduct Played a Major Role in the Collapse of Apartheid in South Africa and Are a Viable Means to End Digital Censorship in China.

The remarks of U.S. Secretary of State Hillary Clinton yesterday that “we stand for a single Internet where all of humanity has equal access to knowledge and ideas” echoed the stern tone of Ronald Reagan twenty years ago when he challenged Soviet leader Mikhail Gorbachev: "Mr. Gorbachev, tear down this wall!"

Fast forward to 2010 where digital walls have replaced brick and mortar to divide repressed citizens of authoritarian regimes from the world’s free flowing current of information and ideas.

Corporate Codes of Conduct a Viable Means to Challenge Digital Censorship in China

Secretary Clinton’s remarks concerning the” information curtain” dividing the world, reminded me of the apartheid era where much greater injustice and unspeakable acts against humanity were challenged and ultimately overcome through the use of corporate codes of conduct.

These corporate codes of conduct, which came to be known as the Sullivan Principles, were pioneered by the African-American preacher Rev. Leon Sullivan, a zealous promoter of corporate social responsibility.

In 1977 Rev. Sullivan was a member of the board of General Motors. At the time, General Motors was one of the largest corporations in the United States. General Motors also happened to be the largest employer of blacks in South Africa, a country which was pursuing a harsh program of state-sanctioned racial segregation and discrimination targeted primarily at the country's indigenous black population

Corporate Codes of Conduct Originally Developed to Challenge Apartheid

Rev. Sullivan developed the codes to apply economic pressure on South Africa in protest of its system of apartheid. Before the end of South Africa's apartheid era, the principles were formally adopted by more than 125 U.S. corporations that had operations in South Africa. Of those companies that formally adopted the principles, at least 100 completely withdrew their existing operations from South Africa. The principles eventually gained wide adoption among United States-based corporations and played a significant role in the collapse of that regime.

In reflecting on the success of his anti-Apartheid efforts, Rev. Sullivan recalled:

Starting with the work place, I tightened the screws step by step and raised the bar step by step. Eventually I got to the point where I said that companies must practice corporate civil disobedience against the laws and I threatened South Africa and said in two years Mandela must be freed, apartheid must end, and blacks must vote or else I'll bring every American company I can out of South Africa.”

Given the success of the Sullivan principles in ending apartheid, we should look at applying the same principles to lift the information curtain in China.

Why Multinationals Should Adopt Corporate Codes of Conduct

Google, to its credit has pioneered this movement, albeit not under the auspices of any articulated corporate code of conduct as far as I know. Google's defiance of China's censorship mandate illustrates the power of corporate social responsibility initiatives to influence and reshape the repressive policies of authoritarian regimes.

While most major multinational companies consider a presence in China critical to their future success, Google has demonstrated that even the largest of corporations are willing to forgo short term gain in the interest of an ultimate triumph over censorship--similar to how corporations sacrificed profits to challenge apartheid in the 1970s and 1980s.

In Google's case this will come at a cost of an estimated $300 million a year in revenue. Although it will hardly make a dent in Google’s coffers, it’s a step forward in the right direction. Sure, China can thumb its nose at Google and Yahoo by pointing to Baidu and Alibaba.

But it risks the alienation of countless other multinationals who could conceivably adopt corporate codes of conduct and refuse to do business with China until the Great Firewall is torn down.

Conclusion

While the preferred course of action of companies concerned about censorship is to avoid repressive regimes altogether, it is likely that some companies will not choose that course. Those that do not should consider a corporate code of conduct so that they can turn their involvement in oppressive systems from a potential human rights liability to a neutral or maybe even positive act of engagement.

The challenge now will be to put these ideas practice by incorporating them into diplomacy and trade policy to apply meaningful pressure on companies to act responsibly through the adoption of corporate codes of conduct.

What do you think?

-Santiago

P.S. A little about my interest in this area: I’ve been an advocate for corporate codes of conduct for well over a decade and authored an extensive note on the topic for the Florida Journal of International Law to address industrial oil pollution in Latin America: Oil's Not Well In Latin America: Curing The Shortcomings Of The Current International Environmental Law Regime In Dealing With Industrial Oil Pollution In Latin America Through Codes Of Conduct Viewed as a cutting edge proposition, the article has since been cited by numerous textbooks and academic journals including West’s Environmental Law treatise, the New York University Journal of International Law and the Georgetown University Journal of International Environmental Law.

Minimize Corporate Governance Issues in Closely-held Corporations with Multiple Large Shareholders

Santiago Cueto — Thu, 21 Jan 2010 11:00:30 -0500

A must read study examining corporate governance issue in closely-held corporations was recently published by the Harvard Law School Forum on Corporate Governance and Financial Regulation.

Closely-held Corporations Integral part of Global Economy

The study is important to business owners and shareholders all over the world given the integral role closely-held corporations play in the global economy. Indeed, the vast majority of firms in the U.S. are closely-held corporations and are a significant part of the business landscape in other countries, e.g. private corporation in Britain, the close corporation in Japan, the GmbH firm in Germany, and the SARL firm in France

Study Examined Benefit of Having Multiple Large Shareholders

The study, Governance Problems in Closely-held Corporations, examined the benefits of shared corporate ownership by using a large cross-sectional dataset of operating and financing patterns of closely-held corporations.

The main problem in closely held corporations, according to the study, is the squeeze out of minority shareholders by the majority shareholders.

The study found that performance is higher for private firms with a diluted ownership structure resulting in substantially higher net income relative to firms with one controlling shareholder and other minority shareholders.

The findings validates and bolsters the prevailing view that multiple large shareholders play an important role in mitigating expropriation and governance problems.

Failure to Take Advantage of Other Protections is a Big Mistake

There was one part of the study that I found particularly interesting. Although legislatures in the U.S. (and other countries) provide basic protection for minority investors in the form of boilerplate shareholder agreements that firms can choose by electing close corporation status, only around five percent of corporations elect to be covered under close corporation statutes, even though around ninety percent of the corporations in the U.S. are eligible. While data for other countries is not available, it would be interesting to see if the pattern is similar.

I think it is a big mistake for shareholders in closely-held corporation to overlook the protections afforded by the laws of their state or province. One of the main advantages of electing close corporation status is that it provides minority shareholders with a comprehensive checklist of agreements, which they can subsequently adjust for their specific situations. This affords some semblance of control in deciding the scope of the relationship relative to the other shareholders.

The Take Away Lesson:

Consider structuring your closely-held corporation with multiple large shareholders. This will not only minimize corporate governance issues but may play a significant role in increasing net income as a result of the focus placed on the monitoring of performance indicators.
Take advantage of the laws and regulations afforded by the laws of your state or province to minimize corporate governance issues. These laws serve as important guideposts in determing the scope of your relationship relative to the other shareholders.

What do you think?

-Santiago

2010 Index of Economic Freedom Released: United States Ranks Eighth

Santiago Cueto — Wed, 20 Jan 2010 17:07:29 -0500

The Wall Street Journal and the Heritage Foundation released its annual 2010 Index of Economic Freedom. Of the world's 20 largest economies, Hong Kong ranked first while the U.S. came in at number eight.

According to the Wall Street Journal article, The U.S. is Not as Free as It Used to Be, a number of factors contributed to the United States’ ranking lower than in previous years. The federal government's heavy-handed intervention in the financial and economic crises of the last two years was cited as the main factor.

There is another factor not mentioned in the article that I believe contributed to the US’ lower ranking--the lack of confidence in our nation’s dispute resolution regime.

Businesses are unwilling to wade into a pool of uncertainty to either prosecute or defend valid claims given the exorbitant cost of litigation. While inroads were made in the past decade towards the arbitration of business disputes, the trend has reversed itself under mounting pressure from special interest groups.

While I have no empirical proof, I have a feeling that the top 7 nations have made great strides in their dispute resolution regimes. It's no surprise Hong Kong is number one given its focus on arbitration, which I wrote about in an earlier post.

Check out the rankings below--what do you think?

-Santiago

Ecuador Class Action Plaintiffs Strike Back at Chevron's Cynical Game of Musical Jurisdictions

Santiago Cueto — Mon, 18 Jan 2010 11:36:22 -0500

The arc of the moral universe is long but it bends toward justice

— Martin Luther King, Jr.

The seventeen-year war between Ecuador’s 30,000 class plaintiffs against oil giant Chevron continues its global odyssey, as the oil giant pulls out every trick in the book to avoid an impending $27 Billion judgment against it in Ecuador for contaminating an immense portion of rainforest and devastating the local population.

Chevron first fought successfully to force plaintiffs to try their lawsuit in Ecuador rather than U.S. courts. Then it sought (unsuccessfully) to win indemnification in U.S. courts from a possible judgment in Ecuador. And now it's filed for arbitration seven thousand miles across the Atlantic in Holland.

Chevron’s latest tactical attempt to escape justice in Ecuador is consistent with its October 2007 press release, in which it promised the plaintiffs “a lifetime” of appellate and collateral litigation if they persisted in pursuing their claims.

Unfortunately for Chevron, it grossly underestimated the resolve of the class plaintiffs to seek justice. As reported in The Wall Street Journal article, Chevron Plaintiffs Ask U.S. Court for Action, the People of Ecuador just filed a Petition to Stay Arbitration in United States District Court (S.D.N.Y) to enjoin Chevron from proceeding on the baseless international arbitration claim it recently filed in Holland. In December the Government of Ecuador filed its own Petition to Stay Arbitration.

As a litigator, I’m mindful that an attorney's obligation to zealously advocate his clients' interest may involve forum shopping as part of the procedural calculus, however, the obligation must be tempered with a keen understanding of what becomes abusive litigation.

Chevron’s global quest for a favorable forum is a text book example of abusive litigation. To litigate a lawsuit across three continents is a cynical game of musical jurisdictions and takes corporate arrogance and the civil justice system to a new low. Isn’t it time for Chevron to take a seat when the music stops in Ecuador?

What do you think?

-Santiago

P.S. This is the third in a series of posts discussing this extremely important case. Be sure to read Chevron Files International Arbitration Claim Against Ecuador: Forum Shopping in the Hague? and Chevron’s Missteps: How Not to Handle Foreign Litigation.

We Have an App for That: Introducing the International Business Law Advisor App for the iPhone

Santiago Cueto — Thu, 14 Jan 2010 01:07:13 -0500

We are thrilled to announce the latest addition to the iTunes App Store--the International Business Law Advisor App for the iPhone.

The App is yet another way we can add exceptional value to our readers utilizing cutting edge technology. In addition to keeping our readers up to date, the App allows users to take advantage of the latest social media tools. With the App they can share each blog post with friends and colleagues through email and twitter--ensuring that everyone stays on top of breaking news and emerging trends in global business.

The International Business Law Advisor App is available as a free download here through the iTunes App Store.

Let us know what you think and please share with your friends and colleagues!

-Santiago

Another Win for Anti-Suit Injunctions and the Integrity of Arbitral Awards

Santiago Cueto — Mon, 11 Jan 2010 23:54:34 -0500

Only 2 weeks into 2010 and I’m seeing a lot of positive movement on the street. The international markets are roaring back to life. Deal makers are picking up the phone again. And lawyers are being hired to put these deals together. Based on this snapshot view, I expect to see international transactions skyrocket as investor confidence and flexible credit terms return. While some may perceive this forecast as abundantly rosy, it is not without its thorns.

As the number of international transactions skyrocket, so do foreign parties' attempts to escape from their arbitration agreements and to force disputes into foreign courts. All too often, a party that thought it would be arbitrating international disputes - and that may have commenced arbitration in the agreed forum - may nevertheless find itself the target of foreign litigation.

A recent federal court decision reinforces strong public policies in favor of arbitration and against improper collateral litigation. In Telenor Mobile Communications v. Storm LLC, the United States Court of Appeals for the Second Circuit affirmed the district court’s granting of an anti-suit injunction against Ukraine litigation in aid of an UNCITRAL arbitration. You can read the decision here.

As the case illustrates, U.S. federal courts are increasingly resistant to efforts to use foreign litigation to interfere with pending international arbitration, and are increasingly willing to brandish their injunctive powers to prevent such interference.

The Telenor decision should cause parties to arbitration agreements to think twice before staging "friendly litigation" in an effort to avoid their contractual obligations, as Judge Robert D. Sack wrote for the court:

Our view, in light of the findings of the arbitration panel and the district court, is that it is Storm's improper collateral litigation, not the arbitral award that is contrary to public policy, viz., the well-established federal public policy in favor of arbitration. "Through the FAA, Congress has declared a strong federal policy favoring arbitration as an alternative means of dispute resolution." (Internal quotation marks omitted)). Collateral and unilateral litigation of arbitrability – or any other issue pertinent to arbitration, for that matter --undertaken in a foreign forum by a party to that arbitration in an attempt to protect itself from an adverse arbitral award would, if indulged, tend seriously to undermine the underlying scheme of the FAA and the New York Convention.

It's reassuring to see that U.S. federal courts are increasingly protecting the integrity of awards rendered in international arbitration and that collateral litigation commenced by a foreign party to avoid an arbitral award will not be tolerated.

Trend to Watch: Look for More U.S. federal courts to hold international parties to their arbitration agreements, and to prevent them from seeking refuge in litigation abroad.

-Santiago

From Startup to Global Domination in 60 Snuggies or Less (or What the Snuggie Can Teach You About Going Global)

Santiago Cueto — Fri, 08 Jan 2010 17:08:39 -0500

The Snuggie was a huge hit in England over Christmas. The product, which was conceived and developed by New York-based Allstar Products Group, LLC, has also been a huge hit in Canada and Australia. For those unfamiliar with the product, the Snuggie is essentially a backwards robe that one wears to keep warm.

By leveraging its success in these markets, this latest American export is quickly building momentum in Asian markets--a natural fit, so to speak, considering it’s manufactured in China.

The Snuggie? Global Domination? How---Why?

The runaway success of the Snuggie in global markets was not the result of some clever viral marketing campaign or stroke-of-luck lightening strike. The company’s extraordinary success was the result of a painstakingly crafted and flawlessly executed global domination campaign.

Elegant Simplicity

Lucky for us, the playbook Snuggie used to dominate world markets is shockingly straight forward and easy to follow. Indeed, the genius of the Snuggie’s global game plan was its elegant simplicity.

A Global Domination Campaign has Several Moving Parts

How did a product that was launched in 2008 become a worldwide phenomenon by 2009? It achieved global dominance with careful attention to the legal landscape underpinning its expansion strategy. It knew exactly what U.S. export regulations covered its product. And more crucially, it knew exactly how to comply with the import laws in each of the foreign markets it entered. This was the Snuggie’s masterstroke and what allowed it to crush world markets in record time.

Your product’s tipping point can come early in the launch stage if you institute a global domination campaign from the outset. This entails ironing out the legal details in both domestic and global markets contemporaneously. While the two-pronged attack requires additional legwork to comply with trade laws in selected international markets, the extra work will pay huge dividends when orders start pouring in from all over the globe.

The 3 Step Formula for a Successful Global Product Launch

Going global has never been easier and should be part of every company’s initial launch strategy. Here are some key points to speed your way to global dominance in your industry:

Step 1: Select your Global Domination Targets.

Review the law in every country that you intend to crush and dominate. Look for foreign customers who resemble your domestic clients and customers. They may not be as difficult to find as you expect. The Snuggie pulled this strategy off flawlessly by first penetrating the UK and Australia, whose consumers have similar tastes to those in the U.S.

Step 2: Penetrate to Dominate

The absolute best way to quickly penetrate a foreign market is to contact your country's consulate or embassy in the foreign market that you're trying to enter. Government Trade Officials are placed in those foreign countries specifically to assist enterprises like yours export products there. These officials collect market data and have access to directories of potential buyers for specific industries. Follow this step and it will be like having your own international consulting firm at your beck and call.

Step 3: Master the Supply Chain.

This requires professional management of the logistics of delivering your product from A to B at just-in-time speeds as your product rapidly reaches critical mass. Unexpected perils such as currency fluctuations, transportation break-down and catastrophic infrastructure damage can all derail the best laid plans. Be sure to have back-up suppliers to keep your empire growing at breakneck speed.

High Octane Resources to Supercharge Your Global Domination Strategy

To supercharge your global domination plans, do not hesitate to utilize the vast arsenal of resources provided by the federal government—they are unparalleled in their scope, depth and breadth. While there is an infinite amount of “how to go global” literature online, there is no better source of information than the U.S. Government—and it’s free. The resources below are among the very best:

Export.Gov

The most important step in going global is understating the legal requirements and regulations associated with you product. Export.gov offers a vast array of helpful guides and resources to help you get started.

Export.gov's Export Program’s Guide is a great resource and offers and overview of industry and country specific counseling and trade leads.

U.S. Department of Commerce

Be sure to visit the United States of Commerce’s BuyUSA division to find an export assistance center near you. The professionals staffing the assistance centers will counsel you all the way through the export process.

Business.gov's Get Started in Exporting guide provides a comprehensive list of resources and services to help small business start up their exporting operation, including information on required licenses.

U.S. Department of State

The U.S. Department of State has a business sector with international market resources such as trade policies and restrictions, country commercial guides, and operational guides to help Americans before doing business overseas.

Export-Import Bank

The Export-Import Bank of the United States has a small business division helping exporters get started. The excellent export guide provides information for businesses that are trying to establish themselves in the export market.

While these resources are not comprehensive, they are the cream of the crop for anyone wanting expert help with their global domination strategy.

What do you think?

-Santiago

Why the European Union Should Allow Class Action Lawsuits

Santiago Cueto — Tue, 05 Jan 2010 23:58:46 -0500

American innovation spawned the personal computer, the internet and the Ipod. All radically changed the way the world accessed information. Under a proposed EU Directive, another American innovation—the class action lawsuit—may radically change the way EU consumers' access justice.

Under the proposal presented by the EU Commission, consumers who suffer at the hands of companies that fix prices or abuse their dominant market position could soon find it easier to launch class action lawsuits for compensatory damages. In an attempt to avoid any abuse of class actions, however, the draft directive underlines that only state bodies or non profit-making organizations appointed by national governments in the EU can bring class action lawsuits in national courts. If adopted as a Directive by the European Commission, EU Member States would be required to implement it or face heavy fines.

In response to increased discontent among EU consumers and entrepreneurs over the rise of antitrust violations, the European Commission published a White Paper, Damage Actions for Breach of the EC Antitrust Rules to explore the utility of class action lawsuits in quelling anticompetitive behavior. The EU Commission wrote:

“With respect to collective redress, the Commission considers that there is a clear need for mechanisms allowing aggregation of the individual claims of victims of antitrust infringements. Individual consumers, but also small businesses, especially those who have suffered scattered and relatively low-value damage, are often deterred from bringing and individual action for damages by the costs, delays, uncertainties, risks and burdens involved. As a result, many of these victims currently remain uncompensated.

Opening the court house gates to private damage actions for alleged violations of EU antitrust law would represent a fundamental shift in EU competition policy on two fronts. First, the proposal would allow victims of EU antitrust violations to recover the estimated billions of Euros they forgo each year under the current enforcement regime.

Second, the proposed change would shift the Commission's overwhelming workload to private plaintiffs. As reported in the Financial Times article, Brussels accepts Microsoft’s browser offer and in the New York Times article, Europe Fines Intel $1.45 Billion in Antitrust Case, resources dedicated to the EU's antitrust enforcement efforts have been pushed to the brink.

Opening the doors to class action redress, would best serve the interests of victimized EU citizens in the following ways:

Consumers would be allowed to create an effective system of private enforcement by means of lawsuits that complement, but do not replace or jeopardize, public enforcement;
Companies would be persuaded to play by the rules, as a greater number of antitrust violations would be detected, which would greatly increase the costs associated with noncompliance; and
EU enforcement would become streamlined and produce beneficial effects in terms of deterrence of future infringements and greater compliance with EU anticompetition policy.

While opponents of the proposed directive fear that the EU would become a forum shopping haven for unscrupulous U.S. attorneys, the export of American ingenuity by way of innovative jurisprudence will prove to be a positive evolutionary step in EU anticompetition law.

Trend to Watch: Look for the EU to Implement Collective Redress Mechanisims to Complement Existing Anticompetition Laws

-Santiago