Last week a federal court judge in Savannah, Georgia denied the request by a Houston-based customhouse brokerage to transfer a case from Savannah to Atlanta, where the broker maintains an office that prepared entry documentation for an import that arrived at the Port of Savannah. While the denial of that motion to transfer seems irrelevant enough, the plaintiff in the case is Nike, Inc. And the case does not involve an error or omission that the broker made when entering a shipment for Nike. Instead, the lawsuit against the broker is for trademark infringement and counterfeiting.
Nike filed its lawsuit earlier this year, seeking a preliminary and permanent injunction, damages, costs, and attorney fees due to the broker’s alleged infringing conduct. According to the complaint, the broker received a call from a person identifying himself as a vice president of an importing company that did not do any prior business with the broker. The broker received a signed POA from that person, who actually was not a representative of the supposed importer. The POA lacked a notary or corporate seal. Based on the POA, the broker filed an entry for what was described as “ladies cotton woven pants.” The shipment, as it turned out, actually consisted of more than 4,000 pairs of counterfeit Nike shoes valued by CBP at over $180,000. The shipment also included more than 5,000 counterfeit Chanel, Coach, and Louis Vuitton handbags.
Nike alleges that the broker filed fraudulent entry documents and that in order to file any entry documents, the broker had to show that it had a “sufficient interest” in the goods and that it had exercised due diligence in obtaining the POA. The lawsuit alleges that the broker did not confirm with the supposed importer that it was aware of the entry or that it had a vice president by the name of “Michael Mai.” The broker also did not confirm that the supposed importer used a generic yahoo.com email account that it received from “Michael Mai” before attempting to enter the shipment in the Port of Savannah. In other words, the broker failed to use “reasonable care” in its handling of the shipment.
In the lawsuit, Nike requests injunctive relief, as well as monetary damages under the Lanham Act that could include between $1,000 and $200,000 per trademark per type of goods sold, and up to $2,000,000 if the court finds the broker’s “use” of the counterfeit mark was willful.
Whether Nike gets a slam dunk judgment in the case remains to be seen. But Nike is certainly sending a strong message to customs brokers – pay attention and exercise the same reasonable care that legitimate importers are required to exercise or Nike will sue the cotton woven pants off of you.
10 November 2010
25 October 2010
Bureau of Industry and Security Seeks Comments from SMEs on Export Controls
On October 6, the Department of Commerce, Bureau of Industry and Security (BIS) published a Notice of Inquiry in the Federal Register requesting comments from small and medium enterprises (SMEs) about their “understanding of and compliance with export controls maintained pursuant to the Export Administration Regulations (EAR).
SMEs will now have an opportunity to offer comments and concerns about the EAR’s administration and enforcement against the backdrop of the President’s National Export Initiative (NEI) which calls for U.S. companies to double exports over the next 5 years.
BIS expects the input will “help it administer and enforce export controls in a manner consistent with U.S. national security” while potentially increasing exports from SMEs. All exporting companies favor and support predictability. SMEs particularly need predictability as they begin to slowly emerge from the depths of the Great Recession.
Continuing outreach efforts and programs like The Export Legal Assistance Network, www.exportlegal.org, can assist exporting companies to understand and comply with their obligations under the EAR. When compliance falls short, consistent enforcement and predictability of penalties would be of great benefit, particularly since the maximum administrative civil penalty level is $250,000 per violation. Perhaps a penalty regime similar to the Administrative Monetary Penalty System (AMPS) used by the Canada Border Services Agency (CBSA) can be adopted for SMEs. Or perhaps BIS can issue warnings, without a monetary penalty, for first-time offenders when a violation of the EAR occurred during a prior time when management was not fully appreciative of the need for compliance or the company did not have the resources to implement a more robust compliance program.
The Notice of Inquiry should cause SMEs to feel empowered to "speak" to BIS on these important issues, whether through trade associations, chambers of commerce, or as single companies.
Comments to BIS are due by December 6, 2010. They should be identified in the subject line as "Notice of Inquiry—SME," and can be delivered by e-mail at publiccomments@bis.doc.gov. Comments can also be faxed to +1.202.482.3355. When faxing, please call the Regulatory Policy Division, at +1.202.482.2440. Comments can also be mailed or sent by courier to: Sheila Quarterman, U.S. Department of Commerce, Bureau of Industry and Security, Office of Exporter Services, Regulatory Policy Division, 14th Street & Pennsylvania Avenue, NW., Room 2705, Washington, DC 20230, Attn: "Notice of Inquiry—SME."
SMEs will now have an opportunity to offer comments and concerns about the EAR’s administration and enforcement against the backdrop of the President’s National Export Initiative (NEI) which calls for U.S. companies to double exports over the next 5 years.
BIS expects the input will “help it administer and enforce export controls in a manner consistent with U.S. national security” while potentially increasing exports from SMEs. All exporting companies favor and support predictability. SMEs particularly need predictability as they begin to slowly emerge from the depths of the Great Recession.
Continuing outreach efforts and programs like The Export Legal Assistance Network, www.exportlegal.org, can assist exporting companies to understand and comply with their obligations under the EAR. When compliance falls short, consistent enforcement and predictability of penalties would be of great benefit, particularly since the maximum administrative civil penalty level is $250,000 per violation. Perhaps a penalty regime similar to the Administrative Monetary Penalty System (AMPS) used by the Canada Border Services Agency (CBSA) can be adopted for SMEs. Or perhaps BIS can issue warnings, without a monetary penalty, for first-time offenders when a violation of the EAR occurred during a prior time when management was not fully appreciative of the need for compliance or the company did not have the resources to implement a more robust compliance program.
The Notice of Inquiry should cause SMEs to feel empowered to "speak" to BIS on these important issues, whether through trade associations, chambers of commerce, or as single companies.
Comments to BIS are due by December 6, 2010. They should be identified in the subject line as "Notice of Inquiry—SME," and can be delivered by e-mail at publiccomments@bis.doc.gov. Comments can also be faxed to +1.202.482.3355. When faxing, please call the Regulatory Policy Division, at +1.202.482.2440. Comments can also be mailed or sent by courier to: Sheila Quarterman, U.S. Department of Commerce, Bureau of Industry and Security, Office of Exporter Services, Regulatory Policy Division, 14th Street & Pennsylvania Avenue, NW., Room 2705, Washington, DC 20230, Attn: "Notice of Inquiry—SME."
03 October 2010
Consultant Representing Foreign Government not “Public Official” Under FCPA
The Department of Justice (DOJ) has issued its third Foreign Corrupt Practices Act Opinion Procedure Release this year. In 2009, the DOJ only issued one Opinion Procedure Release.
The Requestor was a U.S. limited partnership involved in development of natural resources trading and infrastructure. The Requestor was interested in working with a foreign government regarding an approach to particular natural resources infrastructure development. Because the approach was relatively new and the market is dominated by a group of the well-established companies, the Requestor decided it required assistance when entering into discussions with the foreign government.
The Requestor wanted to contract with a Consultant and its sole owner to assist it. The Consultant is a U.S. partnership and an agent of a foreign government, registered under the Foreign Agents Registration Act (FARA). The Consultant has extensive business contacts in the foreign country, and has represented the foreign government before. The Consultant was to be paid a signing bonus by the Requestor at the time the consulting agreement was signed, but the major payment to the Consultant would be in the form of success fee.
Because the Consultant had already represented the foreign government, and because it would continue representing the government at the same time as working with the Requestor, precautionary measures were taken to avoid a conflict of interest between the Consultant’s representation of the Requestor and the Consultant’s independent representation of the foreign government. While consulting for the Requestor, the Consultant’s duties would be limited to the terms of the proposed contract between them.
The DOJ stated that it would not be taking any enforcement action against the Requestor because of the payments made to the Consultant. Even though the Consultant was an agent of the foreign government, because local law permitted the relationship and the Consultant took precautionary steps to avoid the full disclosure of the relationship to the relevant parties, it was determined that the Consultant would not be acting on behalf of the foreign government. Accordingly, the Consultant was not a “foreign official” as defined by the FCPA. The DOJ also made clear that if a violation of the FCPA occurred during the performance of the consultancy, it reserved the right to enforce the law, regardless of the Opinion.
At a time of increased enforcement and ongoing investigations, this Opinion Procedure shows that companies must carefully consider and screen their business dealings that bring them into contact with foreign governments, whether those contacts are direct or indirect. It also shows that in addition to a robust compliance program, publicly-traded and privately-held companies can use proper planning to avoid potential FCPA violations and the severe civil and criminal penalties that can follow.
The Requestor was a U.S. limited partnership involved in development of natural resources trading and infrastructure. The Requestor was interested in working with a foreign government regarding an approach to particular natural resources infrastructure development. Because the approach was relatively new and the market is dominated by a group of the well-established companies, the Requestor decided it required assistance when entering into discussions with the foreign government.
The Requestor wanted to contract with a Consultant and its sole owner to assist it. The Consultant is a U.S. partnership and an agent of a foreign government, registered under the Foreign Agents Registration Act (FARA). The Consultant has extensive business contacts in the foreign country, and has represented the foreign government before. The Consultant was to be paid a signing bonus by the Requestor at the time the consulting agreement was signed, but the major payment to the Consultant would be in the form of success fee.
Because the Consultant had already represented the foreign government, and because it would continue representing the government at the same time as working with the Requestor, precautionary measures were taken to avoid a conflict of interest between the Consultant’s representation of the Requestor and the Consultant’s independent representation of the foreign government. While consulting for the Requestor, the Consultant’s duties would be limited to the terms of the proposed contract between them.
The DOJ stated that it would not be taking any enforcement action against the Requestor because of the payments made to the Consultant. Even though the Consultant was an agent of the foreign government, because local law permitted the relationship and the Consultant took precautionary steps to avoid the full disclosure of the relationship to the relevant parties, it was determined that the Consultant would not be acting on behalf of the foreign government. Accordingly, the Consultant was not a “foreign official” as defined by the FCPA. The DOJ also made clear that if a violation of the FCPA occurred during the performance of the consultancy, it reserved the right to enforce the law, regardless of the Opinion.
At a time of increased enforcement and ongoing investigations, this Opinion Procedure shows that companies must carefully consider and screen their business dealings that bring them into contact with foreign governments, whether those contacts are direct or indirect. It also shows that in addition to a robust compliance program, publicly-traded and privately-held companies can use proper planning to avoid potential FCPA violations and the severe civil and criminal penalties that can follow.
14 September 2010
CBP “Clarifies” Impact of Forms 28/29 on Prior Disclosures
In response to a February 24, 2010 request from the American Association of Exporters and Importers (AAEI), U.S. Customs and Border Protection (CBP) has attempted to clarify whether a CBP Form 28 (Request for Information) and CBP Form 29 (Notice of Action) affect an importer’s ability to make a valid prior disclosure.
In the response, CBP referred to T.D. 98-49 (63 Fed. Reg. 29126, May 28, 1998) in which it disagreed with a commenter that CBP Forms 28 and 29 could not be considered written evidence of commencement of a formal investigation. In T.D. 98-49, CBP explained that it would consider “the substance of the information contained” in the 28/29s and that it would treat each matter on a case-by-case basis, examining the specific facts and circumstances of each case.
CBP’s response to AAEI’s request made clear that as “a matter of law” CBP Forms 28/29 “may be considered a ‘commencement document’ for prior disclosure purposes.” It went on to state that, as a matter of policy, Form 29 will be used as evidence that a formal investigation has been commenced and giving notice to the importer of the investigation. CBP further stated that, as a matter of policy, Form 28 “alone should not be routinely considered a ‘commencement document’” under the prior disclosure regulations. CBP also stated it would be issuing clarifying guidelines setting out the circumstances under which a Form 28 may be used as a “commencement document.”
In its response, CBP clarified that importers should never treat a Form 28 lightly. Instead, as this firm has always advised, importers receiving a CBP Form 28 should stop, analyze, investigate, and thoroughly consider what information is being requested and assess the importer’s potential entire exposure before responding. In this way, the importer and its counsel can determine whether a valid prior disclosure can be and should be made to CBP.
In light of CBP’s response to the AAEI’s request, importers should be even more cautious when receiving CBP Forms 28/29 and more deliberative in the response and decision of whether to submit a prior disclosure.
In the response, CBP referred to T.D. 98-49 (63 Fed. Reg. 29126, May 28, 1998) in which it disagreed with a commenter that CBP Forms 28 and 29 could not be considered written evidence of commencement of a formal investigation. In T.D. 98-49, CBP explained that it would consider “the substance of the information contained” in the 28/29s and that it would treat each matter on a case-by-case basis, examining the specific facts and circumstances of each case.
CBP’s response to AAEI’s request made clear that as “a matter of law” CBP Forms 28/29 “may be considered a ‘commencement document’ for prior disclosure purposes.” It went on to state that, as a matter of policy, Form 29 will be used as evidence that a formal investigation has been commenced and giving notice to the importer of the investigation. CBP further stated that, as a matter of policy, Form 28 “alone should not be routinely considered a ‘commencement document’” under the prior disclosure regulations. CBP also stated it would be issuing clarifying guidelines setting out the circumstances under which a Form 28 may be used as a “commencement document.”
In its response, CBP clarified that importers should never treat a Form 28 lightly. Instead, as this firm has always advised, importers receiving a CBP Form 28 should stop, analyze, investigate, and thoroughly consider what information is being requested and assess the importer’s potential entire exposure before responding. In this way, the importer and its counsel can determine whether a valid prior disclosure can be and should be made to CBP.
In light of CBP’s response to the AAEI’s request, importers should be even more cautious when receiving CBP Forms 28/29 and more deliberative in the response and decision of whether to submit a prior disclosure.
08 September 2010
New York Court Narrowly Reads Arbitral Forum Provision
Many foreign companies do business with companies in New York. Often those companies have cross-border agreements of some form (commercial agent, distributorship, joint venture) that calls for arbitration in the event of a dispute. Frequently, U.S. companies prefer arbitration under the commercial rules of the American Arbitration Association (AAA), so this posting should be of interest to both U.S. and foreign companies that use arbitration provisions in New York.
A New York state appeals court has ruled it is proper to compel non-AAA arbitration, despite a contract provision referring to proceedings pursuant to the American Arbitration Association’s commercial rules.
In a brief and unanimous decision, the Appellate Division, First Department, found that a contract clause calling for arbitration “in accordance with the commercial rules of the American Arbitration Association” does not require the arbitration to be administered by the AAA. The court is an intermediate appellate court having jurisdiction over cases from New York City and the Bronx. The case is Nachmani v. By Design, LLC, 901 N.Y.S.2d 838 (1st Dep’t. 2010).
According to the decision, the petitioner in the case demanded arbitration but not before the AAA, despite this contractual provision. The non-AAA arbitral body was not identified in the decision. For unknown reasons, the respondent waited 4 months before demanding that the arbitration proceed before the AAA. Before doing so, the respondent had already filed a counterclaim and designated its arbitrator.
While some commentators have questioned the decision, it appears that the court viewed the matter as a waiver issue because the respondent began participating in the non-AAA arbitration proceedings before demanding AAA arbitration. The court agreed with the petitioner that the contract clause was properly construed as a choice of law, not a forum selection clause, meaning that the non-AAA arbitral body would apply the AAA commercial rules to its proceedings. The court also pointed out that the respondent that AAA arbitration would not provide the respondent with “any greater assurances of arbitrator impartiality,” indicating that it saw no qualitative difference in which arbitral body administers the arbitration on the issue of impartiality.
The case should put parties on notice that the best practice is to carefully draft international arbitration clauses so their intentions as to which arbitral body will administer the arbitration are stated clearly. In addition, once arbitration is demanded, respondents should promptly decide their strategy to either participate in the proceedings before the body selected by the petitioner or challenge the forum selected or risk waiving those challenges.
A New York state appeals court has ruled it is proper to compel non-AAA arbitration, despite a contract provision referring to proceedings pursuant to the American Arbitration Association’s commercial rules.
In a brief and unanimous decision, the Appellate Division, First Department, found that a contract clause calling for arbitration “in accordance with the commercial rules of the American Arbitration Association” does not require the arbitration to be administered by the AAA. The court is an intermediate appellate court having jurisdiction over cases from New York City and the Bronx. The case is Nachmani v. By Design, LLC, 901 N.Y.S.2d 838 (1st Dep’t. 2010).
According to the decision, the petitioner in the case demanded arbitration but not before the AAA, despite this contractual provision. The non-AAA arbitral body was not identified in the decision. For unknown reasons, the respondent waited 4 months before demanding that the arbitration proceed before the AAA. Before doing so, the respondent had already filed a counterclaim and designated its arbitrator.
While some commentators have questioned the decision, it appears that the court viewed the matter as a waiver issue because the respondent began participating in the non-AAA arbitration proceedings before demanding AAA arbitration. The court agreed with the petitioner that the contract clause was properly construed as a choice of law, not a forum selection clause, meaning that the non-AAA arbitral body would apply the AAA commercial rules to its proceedings. The court also pointed out that the respondent that AAA arbitration would not provide the respondent with “any greater assurances of arbitrator impartiality,” indicating that it saw no qualitative difference in which arbitral body administers the arbitration on the issue of impartiality.
The case should put parties on notice that the best practice is to carefully draft international arbitration clauses so their intentions as to which arbitral body will administer the arbitration are stated clearly. In addition, once arbitration is demanded, respondents should promptly decide their strategy to either participate in the proceedings before the body selected by the petitioner or challenge the forum selected or risk waiving those challenges.
18 August 2010
U.S. Supreme Court Knocks Out Carmack in International Multimodal Shipment
The U.S. Supreme Court has held that the Carmack Amendment does not apply to cargo loss claims where the shipment originates overseas.
A shipment originating overseas under a through bill of lading was transferred from ocean to rail when it reached the U.S. The goods were in good condition when received. However, they were damaged while they were in the possession of the railroad.
The shipper claimed for full recovery for the loss or damage as provided under the terms of the Carmack Amendment. Under Carmack, which is the cargo claim regime under U.S. federal law, shippers are permitted to recover the full value of lost or damaged goods.
On the other hand, as far as the carriers are concerned, under the through bill of lading, the Carriage of Goods by Sea Act (COGSA) should cover the claim. Under COGSA, the shipper may recover damages for lost or damaged goods. However, recovery by the shipper is limited to USD 500.00 per package.
The conflict between Carmack and COGSA, was resolved by the U.S. Supreme Court decision. In Kawasaki Kisen Kaisha Ltd v Regal Benoit Corp, the court held that terms of a through bill of lading issued by an ocean carrier in a multimodal shipment would take precedence over the domestic bill of lading issued by the railroad under Carmack. Therefore, the shipment was subject to COGSA and not Carmack.
In general, COGSA applies to international ocean shipments and related intermodal services under a through bill of lading. Carmack applies to domestic rail and motor shipments. International shippers will have to work with their insurance carriers to be sure that risks are covered properly. Given the USD 500.00 per package limit under COGSA, unless there is a separate agreement with a carrier, it is likely that shippers will have to assume responsibility for a large portion of many claims where the imported shipment is under a through bill of lading.
A shipment originating overseas under a through bill of lading was transferred from ocean to rail when it reached the U.S. The goods were in good condition when received. However, they were damaged while they were in the possession of the railroad.
The shipper claimed for full recovery for the loss or damage as provided under the terms of the Carmack Amendment. Under Carmack, which is the cargo claim regime under U.S. federal law, shippers are permitted to recover the full value of lost or damaged goods.
On the other hand, as far as the carriers are concerned, under the through bill of lading, the Carriage of Goods by Sea Act (COGSA) should cover the claim. Under COGSA, the shipper may recover damages for lost or damaged goods. However, recovery by the shipper is limited to USD 500.00 per package.
The conflict between Carmack and COGSA, was resolved by the U.S. Supreme Court decision. In Kawasaki Kisen Kaisha Ltd v Regal Benoit Corp, the court held that terms of a through bill of lading issued by an ocean carrier in a multimodal shipment would take precedence over the domestic bill of lading issued by the railroad under Carmack. Therefore, the shipment was subject to COGSA and not Carmack.
In general, COGSA applies to international ocean shipments and related intermodal services under a through bill of lading. Carmack applies to domestic rail and motor shipments. International shippers will have to work with their insurance carriers to be sure that risks are covered properly. Given the USD 500.00 per package limit under COGSA, unless there is a separate agreement with a carrier, it is likely that shippers will have to assume responsibility for a large portion of many claims where the imported shipment is under a through bill of lading.
13 July 2010
Court of Appeal for Ontario Rejects Fourth Defence
The Court of Appeal for Ontario has rejected a new, “fourth defence” and has ordered enforcement of an Illinois court judgment of USD 19 million against Canadian defendants.
The U.S. Federal Trade Commission brought proceedings in Chicago and Toronto to recover damages to consumers and prevent the defendants from continuing to operate a cross-border telemarketing business that sold Canadian and foreign lottery tickets to U.S. consumers. In 2005, the FTC amended its Ontario claim to include enforcement of the Illinois judgment. The defendants resisted enforcement in the Ontario proceedings, arguing that they did not have a “meaningful opportunity to be heard” in the Illinois action.
The motion judge agreed and, relying on the Supreme Court of Canada’s well-known decision in Beals v. Saldanha, held there were triable issues relating to the new defence. In Beals, the Supreme Court of Canada held that defences to a foreign judgment include fraud, denial of natural justice, public policy and that, in appropriate circumstances, a new defence might be created.
The Court of Appeal held that the “meaningful opportunity to be heard” was not a new, fourth defence under Beals. The Court found that the defendants were not deprived of a meaningful opportunity to be heard in the U.S. court proceedings. The Court reasoned that any new defence to enforcement of a foreign judgment must be narrow in scope and raise issues not covered by the existing defences. The Court found the defence indistinguishable from the natural justice defence and that the right to be heard is one of the cornerstones of natural justice.
The Court of Appeal also found no basis for refusing to enforce the injunctive relief component of the U.S. court judgment. In doing so, the Court followed the criteria set out in Pro Swing, Inc. v. Elta Golf Inc., a case discussed in the firm’s February, 2006 client alert, “Enforcing U.S. Court Judgments in Canada.”
Whether other provinces follow the Court of Appeal for Ontario remains to be seen. In light of this decision, it should be clear that Ontario companies should defend U.S. lawsuits brought against them. For U.S. companies, the decision should provide additional confidence that U.S. court judgments will be enforced in Canada and particularly in Ontario.
The U.S. Federal Trade Commission brought proceedings in Chicago and Toronto to recover damages to consumers and prevent the defendants from continuing to operate a cross-border telemarketing business that sold Canadian and foreign lottery tickets to U.S. consumers. In 2005, the FTC amended its Ontario claim to include enforcement of the Illinois judgment. The defendants resisted enforcement in the Ontario proceedings, arguing that they did not have a “meaningful opportunity to be heard” in the Illinois action.
The motion judge agreed and, relying on the Supreme Court of Canada’s well-known decision in Beals v. Saldanha, held there were triable issues relating to the new defence. In Beals, the Supreme Court of Canada held that defences to a foreign judgment include fraud, denial of natural justice, public policy and that, in appropriate circumstances, a new defence might be created.
The Court of Appeal held that the “meaningful opportunity to be heard” was not a new, fourth defence under Beals. The Court found that the defendants were not deprived of a meaningful opportunity to be heard in the U.S. court proceedings. The Court reasoned that any new defence to enforcement of a foreign judgment must be narrow in scope and raise issues not covered by the existing defences. The Court found the defence indistinguishable from the natural justice defence and that the right to be heard is one of the cornerstones of natural justice.
The Court of Appeal also found no basis for refusing to enforce the injunctive relief component of the U.S. court judgment. In doing so, the Court followed the criteria set out in Pro Swing, Inc. v. Elta Golf Inc., a case discussed in the firm’s February, 2006 client alert, “Enforcing U.S. Court Judgments in Canada.”
Whether other provinces follow the Court of Appeal for Ontario remains to be seen. In light of this decision, it should be clear that Ontario companies should defend U.S. lawsuits brought against them. For U.S. companies, the decision should provide additional confidence that U.S. court judgments will be enforced in Canada and particularly in Ontario.
22 April 2010
DoD Issues Final Rule for Contractors Regarding Export Controls
The Department of Defense (DoD) has issued its final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to include a clause concerning contractor obligations under the ITAR and the EAR.
The final rule requires that a single clause regarding export controls be used in all solicitations and contracts, regardless of whether the contract involves export-controlled items. In addition, flowdowns are mandated at all contracting tiers.
Under the rule, “Export-controlled items” means items subject to the Export Administration Regulations (EAR) or the International Traffic in Arms Regulations (ITAR) and includes commodities, software and technology. The required clause under DFARS states “The Contractor shall comply with all applicable laws and regulations regarding export-controlled items…” The clause reiterates that compliance with export control laws and regulations exists independent of the DFARS clause.
The DoD rule does not impose new or additional obligations on contractors and simplifies contractual requirements. The flowdown requirement should serve to remind prime contractors and subcontractors of their respective export compliance obligations, including in situations involving technical data, technology or software source code governed by the “deemed export” rule where such information is released to a foreign national (who is not a “green card” holder), even if the release occurs in the U.S.
The final rule requires that a single clause regarding export controls be used in all solicitations and contracts, regardless of whether the contract involves export-controlled items. In addition, flowdowns are mandated at all contracting tiers.
Under the rule, “Export-controlled items” means items subject to the Export Administration Regulations (EAR) or the International Traffic in Arms Regulations (ITAR) and includes commodities, software and technology. The required clause under DFARS states “The Contractor shall comply with all applicable laws and regulations regarding export-controlled items…” The clause reiterates that compliance with export control laws and regulations exists independent of the DFARS clause.
The DoD rule does not impose new or additional obligations on contractors and simplifies contractual requirements. The flowdown requirement should serve to remind prime contractors and subcontractors of their respective export compliance obligations, including in situations involving technical data, technology or software source code governed by the “deemed export” rule where such information is released to a foreign national (who is not a “green card” holder), even if the release occurs in the U.S.
03 March 2010
Key Changes are Coming to AMPS
The Canada Border Services Agency (CSBA) has issued a notice of changes resulting from a review of the Administrative Monetary Penalty System (AMPS).
Announced in Customs Notice 10-002, February 26, 2010, starting in April, the first phase of changes will be implemented. A second phase will go into effect in October, 2010. In light of the upcoming changes to AMPS, the numerous U.S. companies that export to subsidiaries and affiliates located in Canada or are non-resident importers (NRI) must be sure current import practices comply with Canadian laws and regulations. These companies should also become familiar with the changes to AMPS that will go into effect.
AMPS is a civil penalty regime applied to “contraventions” of the Customs Act and the Customs Tariff and the regulations of these laws. AMPS also applies to contraventions of the terms and conditions of licensing agreements. Penalties are imposed based on the type, frequency, and severity of the violations involved. Most penalties are graduated and the importer’s (“client’s”) compliance history will be considered in determining the penalties. Therefore, companies cannot afford to be without a compliance program for their Canadian imports.
The significant changes in April will include changes to the penalty amount and structures. Most penalties based on a percentage of the value of the goods imported will be eliminated. Graduated or flat penalty amounts will replace the percentage penalties. There will also be a 30 day delay in escalating penalty levels from the first to the second levels for low and medium risk contraventions. This change means that if a second Notice of Penalty Assessment (NPA) is issued to the same importer for the same contravention, AMPS will not escalate the penalty for some contraventions unless 30 days have passed since the first NPA was issued or the infraction occurred. This change only applies from the first to the second level. The change includes contraventions: C004, C005, C010, C011, C058, C071, C084-C151, C192, C207, C208, and C342. Other contraventions are being eliminated and 2 are being added in April.
Announced in Customs Notice 10-002, February 26, 2010, starting in April, the first phase of changes will be implemented. A second phase will go into effect in October, 2010. In light of the upcoming changes to AMPS, the numerous U.S. companies that export to subsidiaries and affiliates located in Canada or are non-resident importers (NRI) must be sure current import practices comply with Canadian laws and regulations. These companies should also become familiar with the changes to AMPS that will go into effect.
AMPS is a civil penalty regime applied to “contraventions” of the Customs Act and the Customs Tariff and the regulations of these laws. AMPS also applies to contraventions of the terms and conditions of licensing agreements. Penalties are imposed based on the type, frequency, and severity of the violations involved. Most penalties are graduated and the importer’s (“client’s”) compliance history will be considered in determining the penalties. Therefore, companies cannot afford to be without a compliance program for their Canadian imports.
The significant changes in April will include changes to the penalty amount and structures. Most penalties based on a percentage of the value of the goods imported will be eliminated. Graduated or flat penalty amounts will replace the percentage penalties. There will also be a 30 day delay in escalating penalty levels from the first to the second levels for low and medium risk contraventions. This change means that if a second Notice of Penalty Assessment (NPA) is issued to the same importer for the same contravention, AMPS will not escalate the penalty for some contraventions unless 30 days have passed since the first NPA was issued or the infraction occurred. This change only applies from the first to the second level. The change includes contraventions: C004, C005, C010, C011, C058, C071, C084-C151, C192, C207, C208, and C342. Other contraventions are being eliminated and 2 are being added in April.
22 January 2010
Ohio Instruments Company Implicated in Entity List Penalty
The Bureau of Industry and Security (BIS) announced a settlement with Keithley Instruments International Corporation (“Keithley International”) on a proposed charge of “Evasion.” The settlement required the company to pay a $125,000 civil penalty. Keithley’s U.S. parent company is based in Ohio.
According to the Order and Settlement Agreement, in early 2003 Keithley International and its manager at the time worked with Rajaram Engineering of Bangalore, India to export electronic instruments to Vikram Sarabhai Space Center (“VSSC”) without required export licenses. VSSC is an Indian Space Research Organization entity and designated on the “Entity List.” The products were classified under ECCN 3A992 and designated as EAR99.
The Order and Settlement Agreement provide some details on the activity that led to the proposed charge. According to BIS, Keithley International and its manager structured the sales so that VSSC would order the goods through Rajaram Engineering , so it would appear that Rajaram was the purchaser and end-user of Keithley’s U.S. parent company’s products, not VSSC. Apparently, Keithley International specifically instructed VSSC to place its orders in this way and not with Keithley Instruments, Inc., the U.S. parent company. The company’s manager even went so far as to explain to Rajaram’s owner and manager that structuring the orders in this way would avoid the export licensing requirements because VSSC would not appear in the transactions as the end-user. When Rajaram inquired about becoming a licensed distributor of the U.S. parent company’s products, it was told that it could not because that would “require export licenses to be obtained for items destined for Indian listed entities.” Instead, Keithley International’s manager advised Rajaram to continue to do business as it was structured.
The Order shows that the U.S. parent company and its Indian subsidiary had clear knowledge that VSSC was on the Entity List and, therefore, export licenses would be required. Apparently the company chose to sell through a third-party, rather than apply for export licenses that would have been reviewed on a case-by-case basis. The Order does not provide information about how many sales were involved or completed or the value of those sales. This was not a voluntary self-disclosure case and the settlement agreement does not include an export compliance audit requirement; so presumably, the company simply chose to not follow their export compliance practices here. Maybe the cost of doing business this way was “worth it” in the short term, but the long-arm of BIS caught the company this time. Likely, the company’s export compliance is more robust today than it was in 2003.
According to the Order and Settlement Agreement, in early 2003 Keithley International and its manager at the time worked with Rajaram Engineering of Bangalore, India to export electronic instruments to Vikram Sarabhai Space Center (“VSSC”) without required export licenses. VSSC is an Indian Space Research Organization entity and designated on the “Entity List.” The products were classified under ECCN 3A992 and designated as EAR99.
The Order and Settlement Agreement provide some details on the activity that led to the proposed charge. According to BIS, Keithley International and its manager structured the sales so that VSSC would order the goods through Rajaram Engineering , so it would appear that Rajaram was the purchaser and end-user of Keithley’s U.S. parent company’s products, not VSSC. Apparently, Keithley International specifically instructed VSSC to place its orders in this way and not with Keithley Instruments, Inc., the U.S. parent company. The company’s manager even went so far as to explain to Rajaram’s owner and manager that structuring the orders in this way would avoid the export licensing requirements because VSSC would not appear in the transactions as the end-user. When Rajaram inquired about becoming a licensed distributor of the U.S. parent company’s products, it was told that it could not because that would “require export licenses to be obtained for items destined for Indian listed entities.” Instead, Keithley International’s manager advised Rajaram to continue to do business as it was structured.
The Order shows that the U.S. parent company and its Indian subsidiary had clear knowledge that VSSC was on the Entity List and, therefore, export licenses would be required. Apparently the company chose to sell through a third-party, rather than apply for export licenses that would have been reviewed on a case-by-case basis. The Order does not provide information about how many sales were involved or completed or the value of those sales. This was not a voluntary self-disclosure case and the settlement agreement does not include an export compliance audit requirement; so presumably, the company simply chose to not follow their export compliance practices here. Maybe the cost of doing business this way was “worth it” in the short term, but the long-arm of BIS caught the company this time. Likely, the company’s export compliance is more robust today than it was in 2003.
11 January 2010
The Cost of Entertaining for Lucrative Chinese Contracts: $3M
On the last day of 2009, the Department of Justice announced that a California-based telecommunications company, UTStarcom, Inc., agreed to pay a $1.5M fine for violating the Foreign Corrupt Practices Act.
According to the announcement, the company’s wholly-owned Chinese subsidiary provided travel and other things of value to employees of Chinese state-owned telecommunication firms. The state employees traveled to Hawaii, Las Vegas and New York City, ostensibly for “training” at UTSI’s facilities. Apparently, however, UTSI did not have facilities in those locations and there was no training done. The travel and related costs were recorded as “training expenses,” when, in fact, the entertainment was provided in an effort to obtain and retain lucrative Chinese telecommunications contracts. This, of course, is prohibited under the FCPA.
Reportedly, in addition to the $1.5M fine, UTSI agreed to implement “rigorous internal controls” and cooperate fully with the DOJ. The DOJ agreed not to prosecute UTSI or its subsidiary and the agreement recognized UTSI’s voluntary disclosure and thorough self-investigation of the matter. In addition to being governed by the FPCA’s anti-bribery provisions, as a publicly-traded company UTSI is subject to the Securities and Exchange Commission’s jurisdiction. In a related matter, UTSI reached a settlement with the SEC to pay an additional $1.5M and meet additional obligations over the next 4 years.
This settlement shows that U.S. companies must carefully monitor entertainment and travel expenses for foreign customers and prospective customers when they are employees of a state-owned company. They must also ensure their foreign subsidiaries are compliant with the FCPA.
This settlement is remarkably similar to a settlement the DOJ reached with Lucent Technologies almost 2 years to the date prior. In December, 2007, Lucent settled a case in which it reportedly paid expenses for more than 1,000 employees of Chinese state-owned companies to travel to U.S. destinations. The trips were supposedly to inspect Lucent factories and train the foreign officials in using Lucent technology, but the investigation showed that very little or no time was spent visiting Lucent facilities in the U.S.; instead, the Chinese employees visited tourist destinations including Hawaii, Las Vegas, the Grand Canyon, Niagara Falls, Disney World, Universal Studios, and New York City. Those violations reportedly arose from Lucent’s wholly-owned subsidiary in China.
According to the announcement, the company’s wholly-owned Chinese subsidiary provided travel and other things of value to employees of Chinese state-owned telecommunication firms. The state employees traveled to Hawaii, Las Vegas and New York City, ostensibly for “training” at UTSI’s facilities. Apparently, however, UTSI did not have facilities in those locations and there was no training done. The travel and related costs were recorded as “training expenses,” when, in fact, the entertainment was provided in an effort to obtain and retain lucrative Chinese telecommunications contracts. This, of course, is prohibited under the FCPA.
Reportedly, in addition to the $1.5M fine, UTSI agreed to implement “rigorous internal controls” and cooperate fully with the DOJ. The DOJ agreed not to prosecute UTSI or its subsidiary and the agreement recognized UTSI’s voluntary disclosure and thorough self-investigation of the matter. In addition to being governed by the FPCA’s anti-bribery provisions, as a publicly-traded company UTSI is subject to the Securities and Exchange Commission’s jurisdiction. In a related matter, UTSI reached a settlement with the SEC to pay an additional $1.5M and meet additional obligations over the next 4 years.
This settlement shows that U.S. companies must carefully monitor entertainment and travel expenses for foreign customers and prospective customers when they are employees of a state-owned company. They must also ensure their foreign subsidiaries are compliant with the FCPA.
This settlement is remarkably similar to a settlement the DOJ reached with Lucent Technologies almost 2 years to the date prior. In December, 2007, Lucent settled a case in which it reportedly paid expenses for more than 1,000 employees of Chinese state-owned companies to travel to U.S. destinations. The trips were supposedly to inspect Lucent factories and train the foreign officials in using Lucent technology, but the investigation showed that very little or no time was spent visiting Lucent facilities in the U.S.; instead, the Chinese employees visited tourist destinations including Hawaii, Las Vegas, the Grand Canyon, Niagara Falls, Disney World, Universal Studios, and New York City. Those violations reportedly arose from Lucent’s wholly-owned subsidiary in China.
04 January 2010
Online Poker Players Lose Lawsuit Bet on Forum Non Conveniens Grounds
In the middle of the holiday season, the U.S. Court of Appeals for the Sixth Circuit dealt a losing hand to a group of online poker players who filed a class-action lawsuit against a Gibraltar-based host of online poker games. for those not aware, the Sixth Circuit handles federal court appeals in the states of Kentucky, Michigan, Ohio, and Tennessee.
In Wong v. PartyGaming Ltd., the plaintiffs filed the lawsuit in Ohio, alleging breach of contract, misrepresentation, and violation of Ohio consumer protection laws. PartyGaming moved to dismiss the suit arguing that a forum selection clause in its terms and conditions barred the Ohio action. The plaintiffs had accepted the terms and conditions when they registered on the poker site. The forum selection clause stated that all disputes would be subject to the exclusive jurisdiction of the courts in Gibraltar. The district court dismissed the lawsuit sua sponte on forum non conveniens grounds and the plaintiffs appealed.
In deciding the appeal, the Sixth Circuit had to determine whether the forum selection clause was enforceable. Before doing that it had to determine whether Ohio or federal law controlled that question since the federal court was exercising its diversity jurisdiction. In its analysis, the court of appeals noted that recent Ohio state court decisions “have held that forum selection clauses are less readily enforceable against consumers,” but that federal courts do not recognize this distinction. The Sixth Circuit had not decided this choice of law issue before, so it turned to decisions of sister circuit courts of appeal. It found that a majority of federal appeal courts that had decided the issue applied federal law rather than state law. The Sixth Circuit agreed specifically with the Ninth Circuit’s view that “forum selection clauses significantly implicate federal procedural issues,” and it also noted the importance of maintaining harmony with other circuit courts on issues of law.
In deciding the enforceability of the forum selection clause, the court observed that such clauses are upheld “absent a strong showing that it should be set aside” and that the party opposing the forum selection clause bears the burden of showing it should not be enforced. The court did not find (and the plaintiffs did not claim) that the plaintiffs were fraudulently induced into accepting the forum selection clause. The plaintiffs did not show that the Gibraltar courts would not effectively or fairly handle the lawsuit. In making this finding, the court of appeals noted that it has upheld forum selection clauses calling for proceedings in Brazilian, English, and German forums. The lack of class-action litigation for damages or jury trials did not prove to be “ace-in-the-hole” arguments for the plaintiffs and both were rejected by the court.
Finally, the Sixth Circuit found that the plaintiffs failed to show how litigating in Gibraltar would be so inconvenient that it would be unjust or unreasonable to litigate their claims there. After weighing factors for determining if the district court abused its discretion by sua sponte dismissing the action for forum non conveniens, the court of appeals affirmed the dismissal.
In a concurring opinion, Judge Merrit raised an interesting point. He looked at the practical issue presented in the case and found that the most important fact for him was that “the gambling contract entered into between the parties here is likely illegal in Ohio but completely legal in Gibraltar." His thought was that if Ohio law controlled the contract in question, "the parties probably are guilty of a crime under Ohio law, the contract is void," and both parties could be prosecuted in an Ohio criminal court. In Judge Merrit's view, the forum selection clause had to be read as controlled by English law as “the only way to keep the contract from being void and subject to criminal penalties.”
So I suggest that whether found in the terms and conditions of a purchase order, employment agreement, commercial agent or distributorship agreement, or a click-wrap agreement, an enforceable forum selection clause is essential for international business transactions. This case shows its importance to a non-U.S. party particularly well. Without it here, PartyGaming could have been facing a U.S. class-action lawsuit to be decided by a jury and likely having to first engage in U.S. pretrial discovery. It will not because of its forum selection clause. But maybe even better than a forum selection clause, as a general rule, parties may want to consider using an international arbitration provision. This was the the subject of my 15 November 2009 posting, “Case Dismissed in Michigan; Parties to Arbitrate Contract Dispute in Ontario.”
In Wong v. PartyGaming Ltd., the plaintiffs filed the lawsuit in Ohio, alleging breach of contract, misrepresentation, and violation of Ohio consumer protection laws. PartyGaming moved to dismiss the suit arguing that a forum selection clause in its terms and conditions barred the Ohio action. The plaintiffs had accepted the terms and conditions when they registered on the poker site. The forum selection clause stated that all disputes would be subject to the exclusive jurisdiction of the courts in Gibraltar. The district court dismissed the lawsuit sua sponte on forum non conveniens grounds and the plaintiffs appealed.
In deciding the appeal, the Sixth Circuit had to determine whether the forum selection clause was enforceable. Before doing that it had to determine whether Ohio or federal law controlled that question since the federal court was exercising its diversity jurisdiction. In its analysis, the court of appeals noted that recent Ohio state court decisions “have held that forum selection clauses are less readily enforceable against consumers,” but that federal courts do not recognize this distinction. The Sixth Circuit had not decided this choice of law issue before, so it turned to decisions of sister circuit courts of appeal. It found that a majority of federal appeal courts that had decided the issue applied federal law rather than state law. The Sixth Circuit agreed specifically with the Ninth Circuit’s view that “forum selection clauses significantly implicate federal procedural issues,” and it also noted the importance of maintaining harmony with other circuit courts on issues of law.
In deciding the enforceability of the forum selection clause, the court observed that such clauses are upheld “absent a strong showing that it should be set aside” and that the party opposing the forum selection clause bears the burden of showing it should not be enforced. The court did not find (and the plaintiffs did not claim) that the plaintiffs were fraudulently induced into accepting the forum selection clause. The plaintiffs did not show that the Gibraltar courts would not effectively or fairly handle the lawsuit. In making this finding, the court of appeals noted that it has upheld forum selection clauses calling for proceedings in Brazilian, English, and German forums. The lack of class-action litigation for damages or jury trials did not prove to be “ace-in-the-hole” arguments for the plaintiffs and both were rejected by the court.
Finally, the Sixth Circuit found that the plaintiffs failed to show how litigating in Gibraltar would be so inconvenient that it would be unjust or unreasonable to litigate their claims there. After weighing factors for determining if the district court abused its discretion by sua sponte dismissing the action for forum non conveniens, the court of appeals affirmed the dismissal.
In a concurring opinion, Judge Merrit raised an interesting point. He looked at the practical issue presented in the case and found that the most important fact for him was that “the gambling contract entered into between the parties here is likely illegal in Ohio but completely legal in Gibraltar." His thought was that if Ohio law controlled the contract in question, "the parties probably are guilty of a crime under Ohio law, the contract is void," and both parties could be prosecuted in an Ohio criminal court. In Judge Merrit's view, the forum selection clause had to be read as controlled by English law as “the only way to keep the contract from being void and subject to criminal penalties.”
So I suggest that whether found in the terms and conditions of a purchase order, employment agreement, commercial agent or distributorship agreement, or a click-wrap agreement, an enforceable forum selection clause is essential for international business transactions. This case shows its importance to a non-U.S. party particularly well. Without it here, PartyGaming could have been facing a U.S. class-action lawsuit to be decided by a jury and likely having to first engage in U.S. pretrial discovery. It will not because of its forum selection clause. But maybe even better than a forum selection clause, as a general rule, parties may want to consider using an international arbitration provision. This was the the subject of my 15 November 2009 posting, “Case Dismissed in Michigan; Parties to Arbitrate Contract Dispute in Ontario.”
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