International Business Law Advisor : International Business Lawyer & Attorney : Santiago Cueto Law Firm : Global Business Litigation & Finance Commentary

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

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

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

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

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

      -Santiago

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

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

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

Hague Convention Gives VIP Status to  Documents to Be Used Abroad

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

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

U.S. Origin Documents for Use Abroad

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

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

Foreign Documents for Use in the U.S.

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

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

It’s that easy!

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

         -Santiago

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Define. Scrutinize. Monitor.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What other precautions would you take when dealing with OEMs?

      -Santiago

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s it!

Here are some additional practice pointers to keep in mind:

Time Frame 

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

Country Specific Issues

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

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

Other methods of service

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

Conclusion

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

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

    -Santiago

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

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

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

Here are the details:

90-Minute ABA Teleconference on Doing Business with Japan

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

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

Looks like an excellent program. Will you be attending?

    -Santiago

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

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

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

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

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

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

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

I’ll allow Mr. Friedman to explain:

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

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

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

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

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

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

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

    -Santiago

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

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

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

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

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

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

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

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

How does your company handle this?

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

   -Santiago

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

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

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

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

Brazil

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

India

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

*Cajun Nation

February 7-28  - Super Bowl celebration and Mardi Gras

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

        -Santiago

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And Why Relocating to Switzerland May be the Best Corporate Strategy

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

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

International Tax Increase Buried in Proposed Bill

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

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

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

Proposed Tax Will Force US-based MNCs to Relocate Overseas

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

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

Switzerland Offers Optimal Tax Environment for MNCs

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

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

Conclusion

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

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

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

       --Santiago

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