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.
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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