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.
03 March 2010
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.”
11 December 2009
OECD Recommends Prohibiting Facilitation Payments: Are Changes to the FCPA Far Behind?
Marking the International Anti-Corruption Day this week and the 10 year anniversary of the entry into force of the Organization of Economic Cooperation and Development (OECD) Anti-Bribery Convention, the OECD held a high level roundtable meeting in Paris and heard various officials, including U.S. Secretary of State Hillary Clinton and U.S. Secretary of Commerce Gary Locke.
Importantly, the OECD also released its Recommendation for Further Combating Bribery of Foreign Public Officials. The Recommendation urges OECD member countries to prohibit or discourage using facilitating payments. Specifically, the OECD recommends that member countries periodically review their policies on and approach to facilitating payments.
The OECD also encourages companies to set out internal controls, ethics policies, and compliance programs that expressly prohibit or discourage using facilitating payments, recognizing that these “grease” payments are often illegal in the countries where they are paid. The OECD recommends that, in all cases, these payments be recorded accurately in a company's books and records, including not using agents and intermediaries to carry out the bribe for the company. It is recommended that member countries were advised to raise awareness of public officials about domestic bribery and solicitation laws, with the idea that soliciting and accepting facilitating payments could be stopped through greater awareness.
Under the U.S. Foreign Corrupt Practices Act, of course, facilitating payments are a limited exception to the prohibition against bribery. These payments can only be made to expedite “routine government action.” Examples of acceptable facilitating payments would include small payments to obtain permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country. U.S. companies and nationals may request a statement from the U.S. Department of Justice Department enforcement intentions regarding any proposed business transaction or conduct.
The OECD’s recommendations are not binding on any member countries, including the U.S. Each member country would have to enact changes in their laws. Companies operating within OECD member countries would be wise to heed the recent Recommendation and review their current antibribery policies and practices, particularly with respect to facilitating payments. Adopting these recommended practices now will instill a culture of compliance and avoid potential civil and criminal liabilities. Companies should also work with their compliance advisors and counsel to monitor potential changes in the FCPA and the laws of other OECD member countries.
Importantly, the OECD also released its Recommendation for Further Combating Bribery of Foreign Public Officials. The Recommendation urges OECD member countries to prohibit or discourage using facilitating payments. Specifically, the OECD recommends that member countries periodically review their policies on and approach to facilitating payments.
The OECD also encourages companies to set out internal controls, ethics policies, and compliance programs that expressly prohibit or discourage using facilitating payments, recognizing that these “grease” payments are often illegal in the countries where they are paid. The OECD recommends that, in all cases, these payments be recorded accurately in a company's books and records, including not using agents and intermediaries to carry out the bribe for the company. It is recommended that member countries were advised to raise awareness of public officials about domestic bribery and solicitation laws, with the idea that soliciting and accepting facilitating payments could be stopped through greater awareness.
Under the U.S. Foreign Corrupt Practices Act, of course, facilitating payments are a limited exception to the prohibition against bribery. These payments can only be made to expedite “routine government action.” Examples of acceptable facilitating payments would include small payments to obtain permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products; and scheduling inspections associated with contract performance or transit of goods across country. U.S. companies and nationals may request a statement from the U.S. Department of Justice Department enforcement intentions regarding any proposed business transaction or conduct.
The OECD’s recommendations are not binding on any member countries, including the U.S. Each member country would have to enact changes in their laws. Companies operating within OECD member countries would be wise to heed the recent Recommendation and review their current antibribery policies and practices, particularly with respect to facilitating payments. Adopting these recommended practices now will instill a culture of compliance and avoid potential civil and criminal liabilities. Companies should also work with their compliance advisors and counsel to monitor potential changes in the FCPA and the laws of other OECD member countries.
05 December 2009
Six-figure Antiboycott Penalty Settlement Announced
Last month the Office of Antiboycott Compliance, Bureau of Industry and Security, and York International Corporation settled a civil penalty totaling nearly $141,000. The case involved 122 alleged violations of the antiboycott regulations, 15 C.F.R. 760. In general, the antiboycott regulations prohibit a “U.S. person” from supporting the boycott of Israel sponsored by the Arab League and some countries with significant Muslim populations.
It is important for U.S. and foreign companies and organizations to know that a “U.S. person” includes not only individuals and corporations in the U.S., but also permanent domestic affiliates of foreign parties, as well as U.S. citizens abroad, and “controlled in fact” affiliates of domestic entities. “Controlled in fact” means that the party has the ability to establish company policies and control the daily operations of the foreign affiliate.
This recent settlement should be a wake-up call to companies and organizations of all sizes involved in international business transactions to diligently screen, report, and decline to take actions that violate the antiboycott regulations. York International faced charges that: in 6 instances it engaged in sales involving the sale or transfer of goods or services (including information) from the U.S. to Lebanon, Syria, and the UAE and knowingly refused to do business “with another person” under an agreement with, a requirement or request of a boycotting country; 15 times it engaged in sales or transfers of goods or services from the U.S. to Lebanon, Libya, Kuwait, Oman, Qatar, Syria, Sudan, and the UAE, and supported an unsanctioned boycott by furnishing information about its business relationships with or in the boycotted country; an on 101 occasions, the company failed to report to the Department of Commerce requests to engage in restrictive trade practices or a non-U.S. sanctioned boycott, as required by the regulations.
The settlement agreement shows that 6 violations were based on York International proceeding with transactions that involved documents containing prohibitions or conditions in letters of credit containing language such as: “Under no circumstances may a bank listed in the Arab Israeli boycott blacklist be permitted to negotiate documents under this documentary credit” and “We do not undertake to ship the goods described in this invoice on…vessel…mentioned in the black list of Arab countries…” Invoices and certificates contained statements such as: “We declare that no raw materials of Israeli origin have been used for the production or presentation of the goods mentioned in this invoice.”
The settlement agreement does not disclose the value of the transactions involved, but it will be assumed the overall value was sizeable given the number involved and the size of the penalty. York International voluntarily disclosed to BIS the information concerning the transactions, so the company likely received favorable treatment again demonstrating the importance for companies, non-profits, and other organizations involved in international trade to have a robust export compliance program and the benefits of making a voluntary disclosure.
It is important for U.S. and foreign companies and organizations to know that a “U.S. person” includes not only individuals and corporations in the U.S., but also permanent domestic affiliates of foreign parties, as well as U.S. citizens abroad, and “controlled in fact” affiliates of domestic entities. “Controlled in fact” means that the party has the ability to establish company policies and control the daily operations of the foreign affiliate.
This recent settlement should be a wake-up call to companies and organizations of all sizes involved in international business transactions to diligently screen, report, and decline to take actions that violate the antiboycott regulations. York International faced charges that: in 6 instances it engaged in sales involving the sale or transfer of goods or services (including information) from the U.S. to Lebanon, Syria, and the UAE and knowingly refused to do business “with another person” under an agreement with, a requirement or request of a boycotting country; 15 times it engaged in sales or transfers of goods or services from the U.S. to Lebanon, Libya, Kuwait, Oman, Qatar, Syria, Sudan, and the UAE, and supported an unsanctioned boycott by furnishing information about its business relationships with or in the boycotted country; an on 101 occasions, the company failed to report to the Department of Commerce requests to engage in restrictive trade practices or a non-U.S. sanctioned boycott, as required by the regulations.
The settlement agreement shows that 6 violations were based on York International proceeding with transactions that involved documents containing prohibitions or conditions in letters of credit containing language such as: “Under no circumstances may a bank listed in the Arab Israeli boycott blacklist be permitted to negotiate documents under this documentary credit” and “We do not undertake to ship the goods described in this invoice on…vessel…mentioned in the black list of Arab countries…” Invoices and certificates contained statements such as: “We declare that no raw materials of Israeli origin have been used for the production or presentation of the goods mentioned in this invoice.”
The settlement agreement does not disclose the value of the transactions involved, but it will be assumed the overall value was sizeable given the number involved and the size of the penalty. York International voluntarily disclosed to BIS the information concerning the transactions, so the company likely received favorable treatment again demonstrating the importance for companies, non-profits, and other organizations involved in international trade to have a robust export compliance program and the benefits of making a voluntary disclosure.
15 November 2009
Case Dismissed in Michigan; Parties to Arbitrate Contract Dispute in Ontario
The importance of a clearly stated arbitration provision in a cross-border agreement has benefitted a Canadian company this past week as shown by a decision from the U.S. District Court for the Eastern District of Michigan.
In Powertrain Production Systems, L.L.C. v. Nemak of Canada Corp., the defendant filed a motion to dismiss the complaint filed against it and compel arbitration pursuant to an arbitration provision in its agreement with Powertrain. Powertrain is a manufacturer and supplier of automotive parts in Michigan, while Nemak is an Ontario corporation that produces automobile components for sale to motor vehicle manufacturers. After finding a Powertrain proposal acceptable, Nemak submitted a purchase order (PO) to Powertrain that stated the contract was subject to Nemak’s Global Terms and Conditions. The Global Terms and Conditions provided that all disputed matters under the agreement must be submitted to arbitration, and that the contract terms were to be governed by Ontario law. Binding arbitration was to be conducted before a single arbitrator under the Ontario Arbitrations Act.
Powertrain filed its lawsuit in federal court alleging that Nemak breached its agreement by failing to install anticipated casting capacity which caused a shortfall in the production levels projected in Nemak’s request for proposal. Nemak moved to dismiss the case and compel arbitration and Powertrain did not oppose the motion. Nonetheless, the district court had to determine whether the issue of arbitrability was governed by the U.S. Federal Arbitration Act (the “FAA”) or Ontario law, the stated choice of law contained in the Global Terms and Conditions.
The court concluded that the arbitrability issue was governed by the Federal Arbitration Act, 9 U.S.C. § 1, et seq. It found support for its conclusion in one of its earlier decisions where it concluded that “even in international agreements, the [Federal Arbitration Act] governs the arbitrability of claims and choice-of-law clauses will be applied to the substantive aspects of the arbitration proceedings.” The court went on to note that the U.S. Supreme Court had found that “the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither sentence intrudes upon the other.” The court noted that Powertrain did not dispute the validity of the arbitration agreement. Therefore, applying the principles of its past decision involving similar facts, the court determined that while the FAA governed the arbitrability question and that the dispute was subject to arbitration, the substantive law to be applied in that arbitration was Ontario law. The court ordered the case dismissed and the parties to “submit their issues of disagreement to arbitration forthwith.”
While distance to the forum in Michigan would not be significant, and the Eastern District could quite easily have decided the dispute under Ontario substantive law, Nemak quite likely will benefit from avoiding the expense and invasiveness of U.S. pretrial discovery by having the arbitration conducted in Ontario. It can also be expected that the dispute will be resolved faster than if it were heard in a U.S. court and, of course, the details of the dispute will now become more private. So this case presents me with yet another opportunity to extol the virtues of international arbitration and how its inclusion in almost any type of cross-border agreement can serve the parties well, particularly non-U.S. parties.
In Powertrain Production Systems, L.L.C. v. Nemak of Canada Corp., the defendant filed a motion to dismiss the complaint filed against it and compel arbitration pursuant to an arbitration provision in its agreement with Powertrain. Powertrain is a manufacturer and supplier of automotive parts in Michigan, while Nemak is an Ontario corporation that produces automobile components for sale to motor vehicle manufacturers. After finding a Powertrain proposal acceptable, Nemak submitted a purchase order (PO) to Powertrain that stated the contract was subject to Nemak’s Global Terms and Conditions. The Global Terms and Conditions provided that all disputed matters under the agreement must be submitted to arbitration, and that the contract terms were to be governed by Ontario law. Binding arbitration was to be conducted before a single arbitrator under the Ontario Arbitrations Act.
Powertrain filed its lawsuit in federal court alleging that Nemak breached its agreement by failing to install anticipated casting capacity which caused a shortfall in the production levels projected in Nemak’s request for proposal. Nemak moved to dismiss the case and compel arbitration and Powertrain did not oppose the motion. Nonetheless, the district court had to determine whether the issue of arbitrability was governed by the U.S. Federal Arbitration Act (the “FAA”) or Ontario law, the stated choice of law contained in the Global Terms and Conditions.
The court concluded that the arbitrability issue was governed by the Federal Arbitration Act, 9 U.S.C. § 1, et seq. It found support for its conclusion in one of its earlier decisions where it concluded that “even in international agreements, the [Federal Arbitration Act] governs the arbitrability of claims and choice-of-law clauses will be applied to the substantive aspects of the arbitration proceedings.” The court went on to note that the U.S. Supreme Court had found that “the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither sentence intrudes upon the other.” The court noted that Powertrain did not dispute the validity of the arbitration agreement. Therefore, applying the principles of its past decision involving similar facts, the court determined that while the FAA governed the arbitrability question and that the dispute was subject to arbitration, the substantive law to be applied in that arbitration was Ontario law. The court ordered the case dismissed and the parties to “submit their issues of disagreement to arbitration forthwith.”
While distance to the forum in Michigan would not be significant, and the Eastern District could quite easily have decided the dispute under Ontario substantive law, Nemak quite likely will benefit from avoiding the expense and invasiveness of U.S. pretrial discovery by having the arbitration conducted in Ontario. It can also be expected that the dispute will be resolved faster than if it were heard in a U.S. court and, of course, the details of the dispute will now become more private. So this case presents me with yet another opportunity to extol the virtues of international arbitration and how its inclusion in almost any type of cross-border agreement can serve the parties well, particularly non-U.S. parties.
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