Multi-Level Tipping: Insider Trading Cartoon Series, Vol. XI [VIDEO]

In this Presidential transition season, we bring you a very special episode of the Insider Trading Cartoon Series.

David Smyth has a wide-ranging enforcement and litigation practice that focuses on representation of individuals and corporations facing action by federal and state authorities.

ARTICLE BY David Smyth of Brooks, Pierce, McLendon, Humphrey & Leonard, LLP
Copyright © 2016, Brooks, Pierce, McLendon, Humphrey & Leonard LLP

Part 1 – The Insider Trading Cartoon Series Vol. I — Classical Theory

Part 2 – Insider Trading Cartoon Series, Vol. II — Temporary Insiders

Part 3 – The Insider Trading Cartoon Series, Vol. III — Very Temporary Insiders

Part 4 – Insider Trading Cartoon Series, Vol. IV — Rank-and-File Employees [VIDEO]

Part 5 – Insider Trading Cartoon Series, Vol. V — Misappropriation Theory [VIDEO]

Part 6 – Insider Trading Cartoon Series, Vol. VI — Misappropriation (Part Deux) [VIDEO]

Part 7 – Insider Trading Cartoon Series, Vol. VII — Misappropriation Theory (Part the Third)

Part 8 – Negligence Based Charges – The Insider Trading Cartoon Series, Vol. VIII [VIDEO]

Part 9 – Tender Offers – The Insider Trading Cartoon Series, Vol. IX [VIDEO]

Part 10 – Tipping (Pre-Newman): Insider Trading Cartoon Series, Vol. X

Negotiation By Tweet: The Uncertain Future of U.S. Cuba Relations

U.S. Cuba relationsAfter the announcement of Fidel Castro’s death on November 26, 2016, President Barack Obama sent a message to the Cuban people highlighting his administration’s efforts to improve relations between the United States and Cuba. “History will record and judge the enormous impact of this singular figure on the people and world around him…[T]he Cuban people must know that they have a friend and partner in the United States of America,” Obama said.

President-Elect Donald Trump took a different tack, tweeting simply, “Fidel Castro is dead!”

The following Monday, as the first U.S. direct commercial flight in over 50 years landed in Havana, Mr. Trump tweeted: “If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate deal.” It is unclear what he means by the “deal.” President Obama’s relaxation of restrictions on Cuba is not part of a single deal. Rather, the President’s decision to increase engagement and shift policy toward the island nation has been implemented through a gradual series of Presidential Executive Orders, regulatory changes, and shifts in licensing policy.

Mr. Trump’s threat to terminate the “deal” might be read as a threat to reverse the steps the Obama administration has taken to ease travel and trade restrictions on Cuba. That threat has created a great deal of uncertainty for the future of U.S.-Cuba relations. During his campaign, Mr. Trump sent mixed signals about his approach on Cuba. In September 2015, Mr. Trump reportedly commented that “the concept of opening Cuba is fine.” His stance hardened closer to the election (as he fought for votes in the key electoral state of Florida), reportedly saying that he would close the newly opened U.S. Embassy in Havana and undo President Obama’s policies on Cuba.

Other influences may tend to harden Mr. Trump’s views further. His choice of Reince Priebus has a reputation as a Cuba hawk, as do influential members of the Republican Congressional delegation, including Marco Rubio and Ted Cruz.  Mr. Trump’s choice to head the National Security Council, Michael Flynn, has written that he sees Cuba as a country “allied with” Radical Islamists in a war against the United States.

Theoretically, undoing President Obama’s efforts would be easy for the new Trump administration. There is no legal barrier to reversing most or all of the Obama administration’s Cuba initiatives.

On the other hand, it is somewhat possible that the businessman in President-elect Trump could influence his views on Cuba, especially considering that his own organization reportedly investigated business opportunities in the Cuban hospitality sector as recently as six months ago. Since hospitality is one of the major sectors benefitting from Obama administration’s Cuba policies, it might provide fertile ground for further opening of the relationship.

There may be a possible approach lying between normalization and retrenchment. As noted by the US-Cuba Trade and Economic Council, Mr. Trump may choose to require that the Cuban government meet certain requirements as conditions to continuing the existing initiatives. Such conditions might include concrete steps on human rights. At the same time, enforcement of existing restrictions (which are many) could be beefed up through allocations to the chronically underfunded and understaffed Office of Foreign Assets Control within the U.S. Department of Treasury. But negotiating this middle path will be delicate. The Cuban leadership is extremely sensitive to criticism of its human rights record, but there are small signs of movement. For example, when President Obama visited the island in March 2016, he met personally with dissidents critical of both Castro and the United States. And Fox News reported after Fidel Castro’s death that Raul Castro’s regime has moved away from the worst abuses, including executions of dissidents and long-term sentences of political prisoners. But according to the same report, under the Raoul Castro regime, harassment and short-term detention reportedly continues to be used to disrupt the activities of dissident groups. Navigating those issues will place high demands on the diplomatic skills of Mr. Trump’s administration.

According to a recent Pew Research poll, there is broad approval across party lines for reestablishing diplomatic relations with Cuba and ending the embargo. Many sectors of the American business community would likely oppose rolling back President Obama’s changes, which have broken down economic and social barriers between the United States and Cuba. Travel to Cuba is immensely popular. Many companies have invested millions to enter the Cuban market, with the U.S. government’s authorization. As White House Press Secretary Josh Earnest argued, “unrolling” Obama’s policy is “just not as simple as one tweet might make it seem.” But this may not be enough to sway Mr. Trump.

For American businesses exploring opportunities in Cuba, it is important to be mindful that the next administration is likely to freeze any expansion of Cuba initiatives, at least while the new President sorts out his priorities. In the best case, existing policies might be made contingent on Cuba meeting certain human rights and other objectives important to the new President. Some of the more permissive Obama administration policies could be rescinded, and there may be increased enforcement by OFAC of the restrictions that remain. We also expect that after Inauguration Day, January 20, 2017, work on pending OFAC license applications is likely to be frozen until a clear agenda is set. While the uncertainty is unsettling, we will continue to look to a future, as President Obama stated, “in which the relationship between our two countries is defined not by our differences but by the many things that we share as neighbors and friends – bonds of family, culture, commerce, and common humanity.”

ARTICLE BY J. Scott Maberry & Fatema K. Merchant of Sheppard, Mullin, Richter & Hampton LLP

Copyright © 2016, Sheppard Mullin Richter & Hampton LLP.

Mississippi and Louisiana Attorneys General Among Those Filing Amicus Brief with Supreme Court in New Jersey Sports Wagering Case

Attorney General Jim Hood of Mississippi and Attorney GenerFantasy Sports, New Jersey, Sports Wageringal Jeff Landry of Louisiana joined their counterparts from West Virginia, Arizona, and Wisconsin in filing a brief of Amici Curiae in support of the State of New Jersey’s Petition for Writ of Certiorari in its sports wagering case. In the case styled Governor Christopher J. Christie, et al. v. National Collegiate Athletic Association, et al., an en banc panel of the Third Circuit Court of Appeals interpreted the Professional and Amateur Sports Act, 28 U.S.C. § 3702, as prohibiting States from modifying their existing laws to repeal prohibitions on sports wagering.  As a result of this interpretation, the Supreme Court has been petitioned for writ of certiorari in this case to determine whether the Act commandeers the regulatory authority of the States in violation of the Tenth Amendment.

The crux of Amici States’ argument focuses on the fact that federal law does not directly prohibit sports wagering when it takes place in a State in which such wagering is legal.  Rather, the Act makes it unlawful for a State, other than those that were grandfathered in at the time the Act was enacted, to license or authorize sports wagering.  As a result, the Amici States argue that the federal regulatory approach that currently exists amounts to unconstitutional commandeering instead of lawful preemption under the Supremacy Clause.  However, the Amici States explicitly assert that they take no position on the specific sport wagering laws at issue in this case.  Instead, the Amici States are not concerned in this instance with what Congress regulates but rather the manner in which Congress regulates.

It will be interesting to follow this case through this process to see what, if anything, Congress and the Amici States will do if New Jersey prevails.  Based on the Amici States arguments, Congress could still elect to directly regulate sports wagering, although it appears that the tide has turned and that such regulation would be disfavored by the majority of Americans.  In Mississippi, Mississippi Code § 75-76-101, which requires that all gaming be entirely located and conducted on the licensed premises, would have to be addressed, at a minimum, to implement sports wagering.  Similar laws would have to be addressed to permit sports wagering in Louisiana as well.  In any event, although the arguments in this case are focused primarily on States’ rights in relation to the federal government, the outcome could have interesting consequences in gaming jurisdictions around the nation.

ARTICLE BY Blake M. Fulton of Jones Walker LLP

© 2016 Jones Walker LLP

Jevic Holding Corp.: Is The Supreme Court Now Ready To Strike Down Structured Dismissals?

Supreme Court Bankruptcy Structured DismissalsIn a prior post, we discussed the Third Circuit Court of Appeals’ decision in Jevic Holding Corp., where the court upheld the use of so-called “structured dismissals” in bankruptcy cases, and the Supreme Court’s grant of certiorari. On December 7th, the Supreme Court heard oral argument in Jevic.  The Court’s ultimate ruling will likely have a significant impact upon bankruptcy practice.

Under the Jevic structured dismissal, unsecured creditors received a distribution from a settlement reached between the official committee of unsecured creditors and secured lenders.  Wage priority claimants received nothing from the settlement, notwithstanding their senior position under the Bankruptcy Code.  The bankruptcy court approved the structured dismissal, and by extension the distribution provided for in the settlement, and the district court affirmed on appeal.  The Third Circuit also upheld the structured dismissal, holding that the bankruptcy court has discretion to approve structured dismissals except if there is a showing “that the structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion process.”

Jevic put front and center two competing concerns in bankruptcy.  On its face, the Jevic structured dismissal appears to conflict with the priority rules set forth in section 507 of the Bankruptcy Code, since junior creditors were paid while certain senior creditors were not.  However, the structured dismissal approved in Jevic also arguably maximized creditor recoveries, albeit in a way that skipped over certain senior creditors. The estate was administratively insolvent and without the structured dismissal, the case would have been converted to Chapter 7 and distributions would have been significantly reduced.

The questions posed yesterday to counsel for Petitioners and counsel for Respondents, as well as to government counsel as amicus curiae, were wide-ranging and pointed.  Justice Breyer questioned the statutory basis for the structured dismissal, noting that while no Code provision forbid it, no specific Code provision permitted it either.  Justice Kennedy looked for guidance on the “for cause” standard under section 349(b), which permits bankruptcy courts to modify the effect of dismissal orders.  Justice Sotomayor expressed concern that there was collusion in Jevic among senior and junior creditors to the detriment of other creditors.  Several Justices expressed concern with Respondents’ position that section 363(b) afforded sufficient discretion to the bankruptcy court to approve a distribution that was at odds with the Code’s priority scheme.  According to Respondents, Jevic presented the extraordinary circumstances required by section 363(b) to deviate from the absolute priority rule since no plan was possible and conversion to Chapter 7 would lead to little, if any, distribution.  Justice Sotomayor questioned Respondents’ position that Jevic was a rare case, and Justice Kennedy took a similar position, noting that it is not rare for there to be no prospect of a confirmable plan, a fact cited by Respondents in support of the Jevic structured dismissal.

Predicting the outcome of cases simply from oral argument is imperfect and notoriously dangerous.  Nonetheless, some commentators have opined that a sufficient number of Justices appear to be sufficiently concerned with the Jevic structured dismissal that the Third Circuit’s opinion is in peril.  If the Court reverses the Third Circuit, the question becomes how sweeping the Court’s opinion will be.

A reversal may well imperil so-called “gift plans”, where a secured creditor makes a payment to junior creditor (the “gift”) in order to obtain support for plan confirmation.  The gift allows the junior creditor to obtain a recovery at odds with the Bankruptcy Code’s priority scheme.  If the Court holds that the priority scheme governs all estate distributions, depending upon the scope of the Supreme Court’s opinion, gift plans may not be permitted.

In addition, if the Court rules that the section 507 priority scheme applies to the entirety of a bankruptcy case, such a holding would conceivably threaten the viability of orders that even Petitioners concede are customary in commercial reorganizations, such as wage payment orders and critical vendor orders.  Those represent instances where estate property is distributed in violation of the Code’s priority scheme, but in reliance on the so-called “Doctrine of Necessity,” where payments serve the overall goal of maximizing the debtor’s going concern value to create the possibility of greater distribution to creditors than does liquidation.

In fact, the Court seemed to struggle with how far its ruling should go, asking the parties what was the scope of the holding they wanted the Court to enter.  Counsel for Petitioners was careful to limit the scope of the holding so as to carve out common Chapter 11 practices, such as wage payment and critical vendor orders.  This was in contrast to counsel for the government who said that it was the government’s view that pre-plan distributions in Chapter 11 that violate the priority scheme “are not permissible under any circumstances unless there is consent of the impaired priority claimholder.”  Depending upon the scope of the Court’s opinion, regular and customary Chapter 11 practices, such as critical vendor motions and pre-petition wage motions, may no longer be permitted.

ARTICLE BY Mark A. Salzberg of Squire Patton Boggs (US) LLP

© Copyright 2016 Squire Patton Boggs (US) LLP

Supreme Court Determines that Seal Violation Does Not Mandate Dismissal

Supreme Court qui tam seal violationOn December 6, 2016, the Supreme Court of the United States decided State Farm Fire and Casualty Co. v. United States ex rel. Cori Rigsby and Kerri Rigsby. At issue was whether a qui tam relator’s violation of the seal requirement, 31 U.S.C. § 3730(b)(2), requires a court to dismiss the suit. In a unanimous decision, the Court concluded that violation of the seal does not mandate dismissal, affirming a lower court decision to deny the defendant’s motion to dismiss.

Section 3730(b)(2) requires qui tam complaints to be filed under seal for at least 60 days and provides that they shall not be served on the defendants until the court so orders. The purpose of the seal is to give the government time to investigate. In practice, the government often seeks numerous extensions while it investigates the conduct alleged in the relator’s complaint.

Justice Kennedy, writing for the Court, reasoned that the text of the False Claims Act (FCA) makes no mention of a remedy as harsh as dismissal. The Court also noted that the FCA was intended to protect the government’s interests, whereas mandatory dismissal would run contrary to those interests, as it would put an end to potentially meritorious qui tam suits. Although the Court made no definitive ruling as to what sanction would have been appropriate, it did note that dismissal “remains a possible form of relief,” while “[r]emedial tools like monetary penalties or attorney discipline remain available to punish and deter seal violations even when dismissal is not appropriate.”

We previously wrote about this matter, here.

ARTICLE BY Evan Panich of McDermott Will & Emery

© 2016 McDermott Will & Emery

U.S Supreme Court Revisits Design Patent Damages

design patent appleOn December 6, 2016, the U.S. Supreme Court, in Samsung Electronics Co. Ltd., v. Apple Inc., 580 U.S. ____ (2016), unanimously ruled that in multicomponent products, the “article of manufacture” subject to an award of damages under 35 U.S.C. §289 is not required to be the end product sold to consumers but may only be a component of the product.

In 2007, when Apple launched the iPhone, it had secured several design patents in connection with the launch. When Samsung released a series of smartphones resembling the iPhone, Apple sued Samsung, alleging that the various Samsung smartphones infringed Apple’s design patents. A jury found that several Samsung smartphones did infringe those patents. Apple was awarded $399 million in damages for Samsung’s design patent infringement, the entire profit Samsung made from its sales of the infringing smartphones. The Federal Circuit affirmed the damages award, rejecting Samsung’s argument that damages should be limited because the relevant articles of manufacture were the front face or screen rather than the entire smartphone.

The Supreme Court reversed and remanded the case back to the Federal Circuit. In its unanimous opinion, the Court reasoned that for purposes of a multicomponent product, the relevant “article of manufacture” for arriving at a damages award (based on 35 U.S.C. §289) need not be the end/finished product sold to the consumer but may be only a component of that product. The Court determined that “The Federal Circuit’s narrower reading of the ‘article of manufacture,'” limiting it to the end product, “cannot be squared with the text of §289.” How to arrive at §289 damages? According to the Supreme Court, “Arriving at a damages award under §289 thus involves two steps. First, identify the ‘article of manufacture’ to which the infringed design has been applied. Second, calculate the infringer’s total profit made on that article of manufacture.”

This decision could have potential impact on future design patent infringement cases, especially when calculating infringement damages. It remains to be seen, what kind of guidance the Federal Circuit will provide in addressing the scope of the “article of manufacture” for multicomponent products.

ARTICLE BY Sudip K. Mitra of Vedder Price

© 2016 Vedder Price

Salman Decision: Supreme Court Weighs in on Insider Trading

insider trading law Supreme CourtSignificant decision comes after nearly two decades of silence. For the first time in nearly 20 years, the US Supreme Court has weighed in on insider trading law and handed a victory to the government and its insider trading enforcement efforts. In Salman v. United States,[1] the Court put to bed confusion generated by the US Court of Appeals for the Second Circuit’s decision in United States v. Newman.[2] In Newman, the Second Circuit held that to be guilty of insider trading, (i) a tippee must know that the insider/tipper breached a duty of confidentiality in exchange for a “personal benefit” and (ii) the personal benefit must be an “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similar valuable nature.”

The second part of this holding posed more questions than it answered because it appeared to conflict with the Supreme Court’s 1983 decision in Dirks v. SEC.[3] The Court in Dirks found that an insider/tipper may be liable for insider trading, and a tippee derivative liable, only if the insider disclosed confidential information in exchange for a personal benefit. And this “personal benefit,” Dirks found, can be shown when an insider “makes a gift of confidential information to a trading relative or friend.” But in 2014, Newman injected a pecuniary-gain element into the personal-benefit test, leaving the government and defense counsel to wonder what is required when a tipper gifts information to a relative or friend who then trades on the information. As discussed below, Salman has dispelled this confusion by following Dirks in holding that an insider’s gift of confidential information to a trading relative is a sufficient personal benefit.

The Newman Case

In Newman, defendants Todd Newman and Anthony Chiasson were “remote” or “downstream” tippees charged with trading on material nonpublic information (MNPI) that they received from other tippees concerning earnings information at two prominent technology companies.

At trial, Newman and Chiasson urged the court to adopt jury instructions that predicated guilt upon a showing that they knew the insiders tipped the MNPI in exchange for a personal benefit. US District Judge Richard J. Sullivan found that although such an instruction could be supported by Dirks, he was obliged to follow the Second Circuit’s decision in SEC v. Obus,[4] which, arguably, only required a showing that the tippee knew of a tipper’s breach of duty to establish scienter.[5] Newman and Chiasson were convicted at trial.

On appeal, the Second Circuit reversed both convictions. The court held that a tippee only knows of the tipper’s breach of fiduciary duty if “he knew the information was confidential and divulged for personal benefit.”[6] In other words, the court agreed with defendants that knowledge of a tipper’s breach of fiduciary duty required knowledge that the confidential tip was made in exchange for a personal benefit.[7] But the court further held that a personal benefit cannot be inferred “by the mere fact of a friendship”; rather, it must be established through “proof of a meaningfully close relationship that generates an exchange that is objective, consequential, and that represents at least a potential gain of a pecuniary or similarly valuable nature.”[8] The government appealed the Second Circuit’s decision, but the Supreme Court declined to hear the case.

The Salman Case

In the summer of 2015, the US Court of Appeals for the Ninth Circuit decided United States v. Salman,[9] in which defendant Bassam Yacoub Salman, a remote tippee, had received and traded on MNPI from his brother-in-law Michael Kara, who in turn had obtained the information from his older brother Maher Kara, an investment banker at a large bank. Evidence showed that Salman was aware that the MNPI originated with Maher, and that from 2004 to 2007, Salman and Michael had profited from trading in securities issued by the bank’s clients just before major transactions were announced, but there was no evidence that Maher received any pecuniary benefit for his tips. Salman was convicted at trial.

On appeal, Salman argued that under Newman, the evidence was insufficient to show that Maher had tipped the information to his brother in exchange for a pecuniary benefit or that Salman knew of any such benefit. The court dismissed this argument as a strained misreading of Newman, holding that Newman did not seek to undermine Dirks’s crucial observation that a tipper may obtain a personal benefit when (s)he “makes a gift of confidential information to a trading relative or friend.” Otherwise, as the court noted, “a corporate insider . . . would be free to disclose [MNPI] to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return.” Notably, the Ninth Circuit held that Newman’s personal-benefit language must be interpreted in a narrower way than others might attempt to use it, and that to the extent Newman cannot be interpreted so narrowly, the Ninth Circuit would “decline to follow it.”[10] Salman appealed the Ninth Circuit’s holding, and the Supreme Court granted certiorari.

The Supreme Court’s Decision

In Salman v. United States,[11] the Court unanimously affirmed the Ninth Circuit’s holding. The Court squarely rejected Salman’s argument that an insider must receive a pecuniary quid pro quo from a tippee for there to be a sufficient personal benefit. The Court found that Dirks made clear that a tipper breaches a fiduciary duty—and receives a personal benefit—by making a gift of confidential information to a “trading relative or friend,” which clearly happened in this case. Notably, the Court declined to adopt the government’s broader argument that “a tipper personally benefits whenever the tipper discloses confidential trading information for a noncorporate purpose.”[12] Rather, the Court found that Dirks “easily resolves the narrow issue presented here.”[13] In applying Dirks, the Court found that “Maher, a tipper, provided inside information to a close relative, his brother Michael. Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative,’ and that rule is sufficient to resolve the case at hand.”[14]

Regarding the Second Circuit’s holding in Newman, the Court found that “[t]o the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends, Newman, 773 F.3d, at 452, we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.”[15] The Court held that Salman’s jury was properly instructed that a personal benefit includes the benefit one would obtain from simply making a gift of confidential information to a trading relative, and, accordingly, upheld the Ninth Circuit’s judgment.

The Supreme Court’s decision is extremely significant. Salman resolves confusion raised by Newman by specifically rejecting—as inconsistent with Dirks—the Second Circuit’s requirement that the tipper must receive something of a “pecuniary or similarly valuable nature” in exchange for the information and that a gift to family or friends was insufficient. In so doing, and on the issue of what constitutes a “personal benefit,” the Salman decision essentially turns back the clock on the law of tipper liability to its status pre-Newman, which had partially derailed the government’s insider trading enforcement efforts. Thus, it appears that Salman is a boon to the government’s ability to get its insider trading efforts back on track.

ARTICLE BY David I. Miller, Nathan J. Hochman, Kenneth I. Schacter, E. Andrew Southerling & Grant R. MacQueen of Morgan, Lewis & Bockius LLP
Copyright © 2016 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

[1] 580 U.S. __ (2016).

[2] 773 F.3d 438, 450 (2d Cir. 2014).

[3] 463 U.S. 646 (1983).

[4] 693 F.3d 276 (2d Cir. 2012).

[5] See United States v. Newman, 1:12-cr-00121-RJS-2, Docket No. 215, pp. 3594-3605 (S.D.N.Y. Dec. 10, 2012).

[6] 773 F.3d 438, 450 (2d Cir. 2014) (emphasis added).

[7] Newman, 773 F.3d at 447-49 (“[W]e conclude that a tippee’s knowledge of the insider’s breach necessarily requires knowledge that the insider disclosed confidential information in exchange for personal benefit.”).

[8] Id., 773 F.3d at 452.

[9] 792 F.3d 1087 (9th Cir. 2015).

[10] Id., 2015 WL 4068903 at *6.

[11] 580 U.S. __ (2016).

[12] Slip op., at 7.

[13] Slip op., at 8.

[14] Slip op., at 9.

[15] Slip op., at 10.

Base Erosion Profit Shifting Multilateral Agreement

Base Erosion Profit ShiftingThe most recent element of the ongoing global dispute resolution process is the late November 2016 release of the so-called multilateral instrument (MLI), a cornerstone of the base erosion and profit shifting (BEPS) project. It is an ambitious effort of the Organization for Economic Cooperation and Development (OECD) to impose its will on as many countries as possible. The explanation comprises 85 single-spaced pages and 359 paragraphs. The MLI draft itself is 48 similar pages. The purpose of the MLI is to facilitate implementation of the BEPS Action items without having to go through the tedious process of amending approximately two thousand treaties.

In essence, the MLI implements the BEPS Action items in treaty language. While consistency is obviously an intended result, the MLI recognizes the reality that many countries will not agree to all of the provisions. Accordingly, countries are allowed to sign the agreement, but then opt out of specific provisions or make appropriate reservations with respect to specific treaties. This process is to be undertaken via notification of the “depository” (the OECD). Accordingly, countries will be able to make individual decisions on whether to update a particular treaty using the MLI.

There are a variety of initial questions to be addressed by each country, including:

  • Does it intend to sign the MLI?

  • Which of its treaties will be covered?

  • Will treaty partners agree?

  • What provisions will be included or opted out of? If there is an opt out, the country is supposed to advise the depository of how this impacts each of its treaties. This will be a time-consuming process.

  • How will it negotiate with specific treaty partners with respect to the various technical provisions of the MLI?

The arbitration provisions are intended to implement the BEPS Action 14 recommendations, focused on mandatory binding arbitration. These provisions would apply to a bilateral treaty only if both parties agree. The arbitration articles provide an outline of arbitration procedures, allowing the competent authorities to vary the procedures by mutual agreement. The form of the proceeding provides a default for “last best offer” (or “baseball style”). The parties may also agree to a “reasoned decision” process, which is stated to have no precedential value. If the parties do not agree on either of these forms of proceeding, the competent authorities should endeavor to reach agreement on a form. If there is no agreement, then the arbitration provisions are inapplicable.

Whether the US or other countries will sign the MLI, it seems apparent that the net result will be a period of chaos in treaty relationships, as there will inevitably be: (1) signers and non-signers; (2) reservations; (3) opt outs; etc.

In a world in which the list of countries zealously seeking to protect their tax bases and making proposals to increase domestic tax revenues (following BEPS and related guidance), continually expands, it seems apparent that dispute resolution processes will need to evolve to resolve the tsunami of disputes that are expected to materialize. If this is not the case, then countries and MNEs alike will incur prejudice to their respective interests.

Accordingly, these dispute resolution issues should be on the agenda for consideration as effective tax rate strategies are revisited in the post-BEPS world.

ARTICLE BY Cym H. Lowell of McDermott Will & Emery
© 2016 McDermott Will & Emery

Congress Strengthens Whistleblower Protections for Employees of Government Contractors and Grantees

On December 5, 2016, Congress enacted S. 795, which permanently extends legal protections to employees of federal contractors, subcontractors, grantees, and others employed by entities that receive federal funds who report waste, fraud, or abuse involving federal funds. It would also extend these protections to personal services contractors working on both defense and civilian grant programs.

NDAA Whistleblower Protection

Fraud Whistleblower Protections​The National Defense Authorization Act for Fiscal Year 2013 (NDAA) established a four-year pilot program that prohibits employees of a “contractor, subcontractor, or grantee” from being retaliated against for blowing the whistle on:

  • gross mismanagement of a Federal contract or grant;

  • a gross waste of Federal funds;

  • an abuse of authority  relating to a Federal contract or grant; or

  • a substantial and specific danger to public health or safety, or a violation of law, rule, or regulation related to a Federal contract.

To be protected, the disclosure must be made to a Member of Congress or Congressional committee, an Inspector General, the GAO, a federal employee responsible for contract or grant oversight or management at the relevant agency, an authorized official of DOJ or other law enforcement agency, a court or grand jury or a management official or other employee of the contractor or subcontractor who has the responsibility to investigate, discover, or address misconduct.

The burden of proof and causation standard in NDAA whistleblower cases are very favorable to whistleblowers. The complainant prevails merely by demonstrating that the protected disclosure was a contributing factor in the personnel action, which can be met by showing knowledge and temporal proximity. Remedies include reinstatement, back pay, uncapped compensatory damages (emotional distress damages) and attorney fees and costs.

Unlike the four-year program for civilian contracts, the rights of whistleblowers working on Federal defense contracts are not time-limited.  S. 795 makes this critical whistleblower protection for employees working on civilian contracts permanent.

Purpose of NDAA Whistleblower Protection Law

The December 5, 2016 floor statements of Rep. Chaffetz and Rep. Cummings underscore how courageous whistleblowers play a critical role in combatting waste, fraud and abuse and why they must be protected against retaliation:

Mr. CHAFFETZ:  Mr. Speaker, I rise today in support of this bill, S. 795, a bill to enhance whistleblower protection for contractor and grantee employees. It is a bill with good bipartisan support in both Chambers of Congress. I really do applaud and thank, in particular, the gentleman from Maryland (Mr. CUMMINGS), the ranking member on our committee, who has helped champion this and point this out and lead our efforts in the House on this. In the House, the Committee on Oversight and Government Reform considered an identical bill, the Whistleblower Protections for Contractors Act, introduced by Ranking Member CUMMINGS and myself, and the committee reported this legislation by unanimous consent. In the Senate, it has been Senators MCCASKILL and RON JOHNSON who have worked arm in arm on this and are also very supportive of it. Today we bring up the Senate version of this bill to expedite its approval to get this bill to the President’s desk.

As you know, Mr. Speaker, whistleblowers are invaluable to the oversight work of Congress. We rely on people who are on the front lines seeing things as they truly are to provide information and blow the whistle when they see something going awry. They are one of our best sources of information about waste, fraud, and abuse within the Federal Government.

As an institution, we should try to do everything we can to encourage them to come and speak with us, and when they do, to make sure that they have the proper and adequate protections. That is exactly what this bill does, by recognizing that not all whistleblowers are Federal employees. We have robust Federal recognition and whistleblower protection for Federal employees, and we believe that contractors and others should have that as well.

It makes permanent a successful pilot program that extended whistleblower protections to civilian contractor and grantee employees. It also ensures whistleblower protections are extended to subgrantees and personal services contractors for both defense and civilian contractors. It is important because the Federal Government spends half a trillion dollars a year on grants and contracts. Think about that; half a trillion dollars is going out the door. There is always somebody doing something stupid somewhere; so to have this protection for a whistleblower as a contractor, for instance, just seems wise and prudent.

In overseeing how these funds are spent, the best source for rooting out waste is from grantees, subgrantees, contractors, and subcontractors. One loophole this bill closes is that personal services contractors were not protected in the past. These contractors can be just as valuable in identifying the waste and fraud we are committed to preventing in the first place. It only makes sense to offer those personal services contractors the same protections we give other contractors.

With this bill, we are sending a strong message to both whistleblowers and their employers. We are serious about stopping waste, fraud, and abuse, and we are serious about protecting those who bring that information forward. Every dollar of wasted funds comes from the pocket of the same hardworking men and women who elected us to Congress. It is their money. It is not our money. It is not the Federal Government’s money. It is the taxpayers’ money.

As we work to protect these taxpayer dollars, we also have a duty and responsibility to protect these whistleblowers. They are the best allies we have. S. 795 accomplishes that goal. An identical bill was passed out of our committee. I would appreciate the support of our colleagues to further this. Again, I thank Mr. CUMMINGS for his good work and passion on this. Mr. Speaker, I reserve the balance of my time.

Mr. CUMMINGS. Mr. Speaker, I yield myself such time as I may consume. Mr. Speaker, I rise in strong support of S. 795. I introduced the House companion of this legislation, the Whistleblower Protections for Contractors Act. We are taking up the Senate measure today to make sure this bill can be signed by the President before the end of this Congress.

I want to thank Senator MCCASKILL for all of her hard work and Senator JOHNSON for all that he did to make this bill come to this point.

I would also like to give special thanks to Chairman CHAFFETZ for being an original cosponsor and helping bring this bill to the floor. Our committee has always stood hand in hand with regard to protecting whistleblowers, and we have made it abundantly clear that we will do everything in our power to protect them from any type of retaliation or any type of harm.

Whistleblowers are the front line of defense against waste, fraud, and abuse. Employees who work on Federal contracts and grants see firsthand when taxpayer money is being wasted. They risk their careers to challenge abuses of power and mismanagement of government resources. They must be protected against retaliation when they blow the whistle on wrongdoing.

Just the other day, we had a witness come before our committee, and it was clear that she was very, very concerned about retaliation to the point of almost being shaken. You could actually see it. When we see these folks, we realize and we are reminded of the fact that they bring a very important resource to us as the Committee on Oversight and Government Reform, and that is they bring us information, information that allows us to be able to address problems that we wouldn’t even know about if it were not for them.

I thank Chairman CHAFFETZ and our entire committee for taking the attitude of protecting whistleblowers to the greatest extent we possibly can.

This bill would ensure that more employees are protected by giving subgrantees and personal services contractors the same whistleblower protections currently given to contractors, grant recipients, and subcontractors. This bill also would make protections for civilian contractors and grantees permanent. These are protections that contractors and grantees of the Department of Defense already enjoy.

I urge every Member of Congress to stand up for whistleblowers, to stand up for good government, and to pass this legislation. Mr. Speaker, I urge all Members to vote in favor of this very important and meaningful legislation.

ARTICLE BY Jason Zuckerman of Zuckerman Law
© 2016 Zuckerman Law

NAFTA and the New Trump Administration: Your Top Ten Questions Answered

With the recent U.S. election finally reaching its close, the unexpected election of Mr. Trump has left many multinational companies wondering how the change in administration will impact their business operations. One of the chief issues of concern is Mr. Trump’s campaign rhetoric that the United States should withdraw from the North American Free Trade Agreement (NAFTA) or, perhaps, substantially renegotiate it (with Mr. Trump taking both positions at times).

Many multinational companies have structured their operations on the assumption that the free trade of goods within the NAFTA region was a given, and understandably are nervous regarding the future of the agreement. To help deal with this insecurity, this client alert presents the “top ten” questions every company that relies on NAFTA should be thinking about. Future client alerts will deal comprehensively with all international trade and regulatory areas where significant change could occur under the new administration.

The Top 10 NAFTA Questions

1. What has President-elect Trump promised?

2. Is the promised repeal of NAFTA a real possibility or just campaign rhetoric?

3. Can the Trump administration just withdraw from NAFTA on its own?

4. Will Congress have any role in the withdrawal or be able to alter the way in which any withdrawal occurs?

5 .What are the most likely options — withdrawal, amendment, or no change?

6. Are there limits to how high tariffs could go if there is a full withdrawal?

7. If there is a full withdrawal, what will be the consequences in addition to higher tariffs?

8. Are there countries other than Mexico that are potentially a target for major changes in U.S. trade policy?

9. If NAFTA withdrawal is part of a “war on international trade,” what are some other types of international trade issues I should be monitoring?

10. The possibilities sound pretty scary. What can my company do to help mitigate the risk of a NAFTA exit?

The Top Ten NAFTA Questions Answered (or, What to Do If the New Administration Plays the NAFTA Trump Card)

1. What has President-elect Trump promised?

After calling NAFTA “the worst trade deal maybe ever signed anywhere,”1 Mr. Trump stated that he either would seek a full repeal of the agreement or would seek to renegotiate it to remove incentives to transfer manufacturing and jobs to Mexico. Mr. Trump’s “100-day action plan to Make America Great Again” confirmed that NAFTA would be a focus of the early days of the administration, as it promised that within 100 days of taking office, Mr. Trump would “announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205.”2 Action on NAFTA likely will be a priority of the Trump administration.

2. Is the promised repeal of NAFTA a real possibility or just campaign rhetoric?

The election of Mr. Trump ran straight through such manufacturing states as Wisconsin, Ohio, and Pennsylvania. In each of these states, anger about lost manufacturing jobs, and their often high wages, was a deciding factor for key swing voters. It is fair to say that discontent about the loss of manufacturing jobs in general, and the accompanying anger with NAFTA in particular, likely tipped these closely contested states — and therefore the election — to Mr. Trump.

With the high visibility given to NAFTA, it is highly likely that there will be either a NAFTA withdrawal or at least enough of a renegotiation of its terms that Mr. Trump can claim that his administration has “fixed” NAFTA. Certainly the Mexican and Canadian governments believe Mr. Trump is serious: Leaders of both countries have stated they are open to renegotiating the terms of NAFTA, although Mexico stated its willingness was more along the lines of having a “discussion” of potential changes.3

3. Can the Trump administration just withdraw from NAFTA on its own?

Article 2205 of NAFTA provides that “{a} party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.” Thus, withdrawal could potentially be effective as early as the summer of 2017. In all likelihood, however, there would initially be a period where renegotiation is attempted, thus delaying any unilateral withdrawal. The likelihood of a withdrawal by this summer accordingly is very small. Further, as noted below, duties would not change for likely a year or more after any withdrawal occurs.

4. Will Congress have any role in the withdrawal or be able to alter the way in which any withdrawal occurs?

Although NAFTA was approved by Congress, it is technically not a treaty. Rather, it is a congressional-executive agreement approved by a majority vote of each house of Congress, as are the World Trade Organization (WTO) agreements). NAFTA was put in place pursuant to the Trade Act of 1974, which gives the president authority to negotiate agreements dealing with tariff and non-tariff barriers. Section 125 of the 1974 act gives the right to terminate and withdraw solely to the president, after giving appropriate notice (six months, as specified in NAFTA).4

5 .What are the most likely options — withdrawal, amendment, or no change?

Although Mr. Trump has repeatedly criticized NAFTA (as well as other trade agreements, such as the WTO agreements), he did not state that he was against all trade agreements. Instead, he stated his view that many existing free trade agreements (FTAs) were poorly negotiated, and thus were not in the interest of the United States and U.S. manufacturers. This position opens up several possibilities regarding NAFTA, ranging from complete withdrawal to severe or even moderate renegotiation. The criticism of NAFTA thus could be used as a way of creating negotiating leverage to allow for the targeted reopening of the agreement.

Despite the campaign rhetoric, millions of U.S. jobs depend on trade between the United States, Canada, and Mexico. Canada and Mexico are, respectively, the first and second largest export markets for the United States. (Although China is a larger overall trading partner, China trade is heavily weighted towards exports to the United States.)5 Much of the trade with Mexico, in particular, involves the shipment of U.S. goods to Mexico for assembly and then the return of the downstream products to the United States. Eliminating NAFTA without any replacement would create tremendous upheaval in these international supply chains. This would lead to significant job losses in the short term and the stranding of significant investments that were made based on the promise of free trade benefits.

As a result, impacted companies likely will exert tremendous pressure on Mr. Trump to amend, rather than repeal, NAFTA. Significant changes to NAFTA would support Mr. Trump’s claim that business negotiators would be able to achieve better FTAs than “career diplomats,” while still allowing him to claim that he has carried through on his NAFTA promises.

There are also strong reasons on the partner side to believe that renegotiation, rather than withdrawal, is most likely to occur. Since Canada shares concerns about the transfer of jobs to Mexico, it would not be surprising if Canada were to align with the United States on certain issues that it would prefer to see amended. As for Mexico, NAFTA is too important to the Mexican economy for Mexico to give up its free trade access to the United States without a fight. Even if Mexico would prefer that the agreement remain as written, giving up trade concessions would be far preferable to risking the likely recession and economic upheaval that would accompany withdrawal and the shift of U.S. multinational companies to other locations.

The effect of NAFTA withdrawal also could have the side effect of increasing illegal immigration — another Trump signature issue. Upheaval in the Mexican economy and any recession as a result would almost certainly lead to an increased desire for Mexican workers to leave Mexico for the much stronger U.S. economy. Avoiding a large increase in illegal immigration from Mexico (which actually has been falling in recent years) may pressure Mr. Trump to amend, rather than eliminate, NAFTA.

6. Are there limits to how high tariffs could go if there is a full withdrawal?

As a general matter, the Trade Act of 1974 provides that after any withdrawal from a covered agreement, impacted tariff rates will remain unchanged for one year. This is to allow businesses time to adjust to any change. The president is allowed to raise tariffs more quickly if there is a need for expeditious action, so long as Congress is notified and a public hearing is held, but this option is unlikely to be triggered.6 Thus, for all intents and purposes, there will be no increase in tariffs for at least 18 months (the six-month notice period plus the additional year of frozen duty rates).

Beyond that, if the United States withdraws from NAFTA, there are two sets of default options that come into play. The U.S.-Canada Free Trade Agreement — which preceded NAFTA — is still in effect, as it was only suspended when NAFTA came into force. So withdrawal from NAFTA would likely bring the U.S.-Canada FTA back into play. Although not automatic, reinstatement of that U.S.-Canada FTA likely would be politically acceptable, both because Mr. Trump did not focus any attention on Canada in particular when criticizing NAFTA, and because the trade deficit with Canada itself is quite small when compared to the deficit with Mexico. Further, with Canada often exporting natural resources such as petroleum to the United States, its exports are not viewed as displacing U.S. manufacturing jobs. Indeed, with there being some concern in Canada that its own manufacturing base has been hollowed out in recent years, Canada might even join the United States in seeking certain modifications to NAFTA.

If the U.S.-Canada FTA is brought out of suspension, trade between the two countries may be a lot like it is under NAFTA. The tariff rates under the U.S.-Canada FTA are often the same as the rates under the NAFTA (i.e., often zero). The U.S.-Canada FTA also includes many of the same types of FTA protections as contained in NAFTA, such as providing the means of appealing disputes to special arbitrator panels. Thus, the impact of repeal with regard to dealings with Canada is limited because the fallback position is another FTA.

It is trade with Mexico that could potentially see more changes. NAFTA is the only FTA possibility in place between the United States and Mexico. Without any type of FTA in place, the tariffs between the United States and Mexico would be based on pre-NAFTA levels. The extent of the rise is dictated by two different legal documents:

  • Under U.S. law, tariffs are allowed to rise to a level that is between 20 and 50 percent higher than the rates in effect on January 1, 1975.7 Because tariff rates were much higher in 1975, this would allow for very large tariff increases.

  • This degree of increase would not occur, however, because the extent of any increase in tariffs is limited by the WTO agreements, which are multilateral agreements that are independent of NAFTA. Due to the operation of the most favored nation (MFN) tariff rules, tariffs for Mexico and the United States would be set based upon the average tariff rates in place for each country. The United States has a low MFN rate, which means that even though U.S. law otherwise allows for large increases based on 1975 tariff levels, existing WTO rules would limit the increase to a general maximum of 3.5 percent.

The irony is that the increase in Mexican tariffs would be much greater than 3.5 percent. The Mexico MFN rate is much higher than the U.S. rate, meaning that Mexican duties could increase to as much as 36 percent. This means that the tariff impact of NAFTA withdrawal would actually be felt more acutely on the U.S. side of the border, as the rate levied by Mexico on exports from the United States would rise to a much greater degree than the rate that could be levied by U.S. Customs & Border Patrol on imports from Mexico. Withdrawal, supposedly intended to aid U.S. manufacturing, would asymmetrically result in much higher tariffs for U.S. exports.

7. If there is a full withdrawal, what will be the consequences in addition to higher tariffs?

Including negotiated annexes, NAFTA is more than 2,000 pages long. In addition to a full phase-out of tariffs, NAFTA also eliminated a variety of non-tariff barriers (import licenses, local-content requirements, export-performance requirements, and other non-tariff barriers). NAFTA helped unify customs procedures and regulations, provided uniform investment rules, established fair and open procurement procedures, and gave firms the right to repatriate profits and capital, among other trade and investment provisions. It also provided a mechanism for settlement of many bilateral disputes. All of these investments in trade stability could disappear if NAFTA is no longer in force.

Another wild card is the impact of any withdrawal of the maquiladora rules. The maquiladora rules pre-date NAFTA, and provide for special tariff rates and other advantages for companies in the maquiladora region (generally, within 75 miles of the U.S. border, although they can be located elsewhere). Such industries as the automotive, aerospace, medical devices, and electronics industries have turned the maquiladora region into a sophisticated manufacturing hub, making maquiladora operations essential parts of the complex supply chains established by U.S. companies that operate within this region. There was no discussion of the maquiladora special tariffs during the campaign, and it is unknown whether there will be any changes in these rules. Although it is a program run by Mexico, its growth in use has been spurred by NAFTA, and the United States has cooperated in many aspects of the maquiladora program. It is unknown whether the rules will change in light of any NAFTA modifications or withdrawal.

8. Are there countries other than Mexico that are potentially a target for major changes in U.S. trade policy?

Equal to the criticisms of NAFTA (which are largely criticisms of trade with Mexico, not Canada) were criticisms of China. China is a juicy target for campaign rhetoric, since it not only is a large trade partner, but also is a country that frequently exports while importing far less. Far more manufacturing jobs depend on exports to Mexico than to exports to China.

The 100-day plan states that Mr. Trump will “direct my Secretary of the Treasury to label China a currency manipulator.”8 This designation takes advantage of a law passed this year that allows for retaliation against countries that manipulate currencies to give their goods an artificial advantage. Any such designation might be accompanied by other actions against China, such as designating currency manipulation as a countervailable subsidy in countervailing duty investigations and administrative reviews or taking action against Chinese imports in other ways, such as through safeguard actions. Mr. Trump’s 7-Point Plan to Rebuild the American Economy by Fighting for Free Trade also vowed to raise tariffs on Chinese imports and to bring cases against China for any violations of international trade agreements, as well as to incorporate the campaign promise to label China a currency manipulator.9

China also is not a member of any FTA with the United States, and thus is reliant on its membership in the WTO to provide what trade protections are available to it. Any attempts to lower the trade deficit have to include China, as trade with China represents more than 40 percent of the overall trade deficit.10 Yet proposals by Mr. Trump to place high tariffs on imports from China likely would run afoul of WTO rules, which may mean that fights against Chinese imports need to take place using international trade litigation (described below).

Looking past China and Mexico, there are three other countries with significant trade deficits with the United States: Japan, South Korea, and Germany. None of these countries was singled out the way Mexico and China were during the campaign; nonetheless, the trade deficit represented by these countries is also significant. There is a heightened probability that these countries will, at the very least, be singled out through such international trade remedies as antidumping, countervailing duty, and safeguard actions, as discussed below.

9. If NAFTA withdrawal is part of a “war on international trade,” what are some other types of international trade issues I should be monitoring?

Regardless of whether NAFTA is terminated, there is a wide variety of international trade actions that can be taken to limit the amount of imports from Canada, Mexico, and other countries that are not parties to NAFTA. These include:

  • Section 301 proceedings. Section 301 of the Trade Act of 1974 gives the U.S. trade representative, at the direction of the president, the ability to impose tariffs based on “an act, policy, or practice of a foreign country that is unreasonable or discriminatory and burdens or restricts U.S. commerce.” One of the remedies that can be imposed is higher tariffs on imports from a chosen country.

  • Section 122 balance-of-payment proceedings. Section 122 of the Trade Act of 1974 authorizes the president to deal with “large and serious United States balance-of-payments deficits” by imposing temporary import surcharges or temporary quotas or a combination of both. This relief is limited and temporary, however, as it can only last 150 days, and the charge cannot exceed 15 percent of the ad valorem value of the imported goods.

  • Section 232(b) national security actions. Where there is a deemed threat to national security, Section 232(b) of the Trade Expansion Act of 1962 authorizes the secretary of commerce to investigate imports and then take actions to limit or restrict them, or to “take such other actions as the president deems necessary to adjust the imports of such articles so that such imports will not threaten to impair the national security.”

  • International trade remedies (safeguard proceedings and antidumping/countervailing duty investigations). These forms of international trade remedies focus on relief for individual products, types of products, or industries. They do not provide the same type of general relief as afforded by a wholesale increase in customs duties, but can offer powerful relief in a more targeted fashion. Duties in antidumping and countervailing duty proceedings often exceed 10 – 20 percent of the entered value of subject merchandise (depending upon the information submitted in lengthy and detailed questionnaire submissions). If non-U.S. companies do not respond to the detailed requests for information, the duties imposed are based upon “facts available,” which is intended to be punitive and can result in duties that exceed the value of the goods themselves by more than 100 percent. Safeguard proceedings can result in targeted duties on entire industries as well.

  • Section 337 unfair trade practices proceedings. These proceedings target unfair trade practices, including the abuse of patent and trademark rights. In some recent cases, U.S. companies have created novel theories that would allow the International Trade Commission to reach a wide variety of conduct, thereby expanding the use of the section 337 process to address perceived unfair trade practices.

The potential increase in international trade remedies is a complicated subject in and of itself. This is especially true for certain industries of concern to Mexico and Canada, such as the steel and softwood lumber industries. (In this regard, antidumping and countervailing duty petitions on softwood lumber from Canada were filed on November 25, 2016.) This topic will be explored in a future client alert devoted to international trade remedies under the Trump administration.

10. The possibilities sound pretty scary. What can my company do to help mitigate the risk of a NAFTA exit?

As noted above, there is a wide set of possibilities, ranging from moderate (or even no) change to complete revocation of the agreement. Predicting the exact impact of any change to NAFTA can be difficult. Multinational corporations with operations in Mexico should, however, consider the following topics when determining how best to cope with the uncertainty of a potential NAFTA exit:

  • Customs Issues

    • Assess which party is the importer of record. Because of the absence of duties, many companies in the NAFTA region paid little attention to which company acts as the importer of record. Because the importer of record is responsible for the payment of duties, a review of the entity that is acting as the importer of record, and assessing whether this arrangement makes sense in a post-NAFTA world, could help avoid unpleasant surprises.

    • Assess whether processing outside the customs territory can be used. Depending on which way the trade is occurring and the form of the transaction, there are various types of warehousing and manufacturing options that are deemed to be outside the customs territory of the country at issue, such as through the use of foreign trade zones (FTZs). Goods that are in an FTZ are considered not to have entered into the customs territory of the country, thus delaying any payment of duties. If the goods are later shipped to a different country — even the originating country — then no duties are ever paid, even if the goods were further manufactured while in the FTZ. This is a valid option to consider for goods that require processing before they are shipped to another country or back to the originating country.

    • Assess whether other customs options exist. In addition to FTZs, there are additional options for goods that can delay or eliminate duties, including the use of customs bonded warehouses or Temporary Importation Under Bond. Such options become more valuable if NAFTA tariff relief is eliminated.

    • Assess whether refunds of duties are possible. For goods that are involved in a round trip, there can be options where duty refunds can occur, including the use of the American Goods Returned program (where the goods are not further improved while abroad), Mexican and U.S. duty drawback procedures, and other refund programs. Eligibility can vary and depends upon the exact form of the importation pattern.

    • Determine if all customs valuation options are being used. When the tariff rate is zero, the precise value of the goods entered is of little moment. But in a tariff environment, strategies such as the first-sale doctrine (which allows for value to be entered based on the first sale to a middle man, rather than the final price) become more valuable as a means of minimizing duties.

  • Supply Chain Options

    • Assess the supply base and what alternatives exist. Companies that have the option of using NAFTA generally have found Mexico to be the cheapest option, due not only to NAFTA regional preferences, but also due to inexpensive transportation options between the two countries. Companies should assess whether Mexico-sourcing still makes sense in a post-NAFTA world, and be prepared with a contingency plan if NAFTA exit becomes a reality. Options would include taking advantage of other FTAs, reshoring manufacturing options, or some of the other customs alternatives outlined above.

    • Assess maquiladora manufacturing options. NAFTA withdrawal might not impact all operations equally, due to the fact that the maquiladora benefits (which are granted by Mexico) will likely remain. The benefits of the maquiladora program include the ability to temporarily import goods and services that will be manufactured, transformed, or repaired, and then re-exported back to the United States, without paying taxes, being subject to compensatory quotas, and other designated benefits. For companies whose operations qualify, these benefits may make continuing Mexican operations profitable, even if duties increase. Companies that are not taking advantage of these cost-saving opportunities might want to consider them as a means of potentially offsetting some measure of any increased tariffs.

  • Political Options

    • Consider seeking miscellaneous tariff bill options. From time to time, Congress passes a Miscellaneous Tariff Bill (MTB), which allows for the grant of customs duty forbearance for specific products. Companies that operate in Mexico have not needed to pay attention to this repeated Washington rite, because their products already enjoyed duty-free status. In a post-NAFTA world, the MTB might become an option worth monitoring and pursuing for products that meet the requirements for consideration.11

    • Consider options for political pressure. NAFTA represents a trillion dollars of annual bilateral trade. Any actions to up-end that arrangement are going to be contentious, heavily lobbied, and feature winners and losers. Companies that are part of well-connected industries and trade associations will be able to enhance their ability to come out on top if the agreement is renegotiated.

  • International Trade Litigation Issues

    • Assess if trade litigation is likely to impact important products and inputs. Regardless of how NAFTA changes, the likelihood of increased trade frictions in the form of international trade litigation is highly likely. Antidumping and countervailing duty actions are likely to increase in the new administration, as potentially will Section 337 and safeguard actions. To deal with this possibility, companies that deal with goods from other countries, including Canada and Mexico, should consider monitoring rumors of potential filings, assessing whether important goods are in industries where trade actions are common (steel products, chemicals), products where there are rumors regarding potential filings (various steel products, softwood lumber from Canada, and so forth), and monitoring whether imports are of products where imports have been sharply rising, especially if at low prices. Import trends can be monitored for any Harmonized Tariff System number on the website of the International Trade Commission.12

    • Consider going on offense. It is widely anticipated that the new administration will be more receptive to the filing of antidumping and countervailing duty actions, safeguard proceedings, and other forms of international trade remedies. If a case can be made that products are being sold at low prices in the United States by foreign producers or are receiving subsidies, and these imports are causing material injury to the U.S. industry producing the same product, it may make sense to consider filing a petition to seek import relief. Questionnaires to help assess whether such an action has a potential basis are available by contacting the author at the contact information listed at the end of this alert.

The issues outlined in this alert are only the tip of the international trade iceberg. Companies that have significant operations that could be impacted by the potential NAFTA changes should consider lining up counsel to monitor ongoing developments in the area, suggest coping strategies, and take other measures to mitigate the risk of a NAFTA exit. Billions of dollars of exports, and millions of manufacturing jobs, will be impacted based on how the NAFTA withdrawal/renegotiation is handled. With that much money at stake, it behooves companies with operations, sales, imports, and exports that depend on or are impacted by NAFTA to closely monitor any changes in the Agreement.

ARTICLE BY Gregory Husisian of Foley & Lardner LLP

1 See http://money.cnn.com/2016/09/27/news/economy/donald-trump-nafta-hillary-clinton-debate/?iid=EL.

2 See https://assets.donaldjtrump.com/_landings/contract/O-TRU-102316-Contractv02.pdf.

3 See http://abcnews.go.com/International/wireStory/canadian-immigration-website-crashes-amid-trump-victory-43413321 and https://www.yahoo.com/news/mexico-says-ready-modernize-nafta-trump-181527988.html.

4 NAFTA was negotiated under the fast-track authority of the Omnibus Trade and Tariff Act of 1988, which made the termination and withdrawal provisions of Section 125 of the 1974 Act applicable to NAFTA.

5 See https://www.census.gov/foreign-trade/statistics/highlights/top/top1312yr.html.

6 See Trade Act of 1974, Public Law 93-618 as amended), P.L. 114-125, § 125 (available at https://legcounsel.house.gov/Comps/93-618.pdf).

7 See Trade Act of 1974, Public Law 93-618 as amended), P.L. 114-125, § 125(c) (available at https://legcounsel.house.gov/Comps/93-618.pdf).

8 See https://assets.donaldjtrump.com/_landings/contract/O-TRU-102316-Contractv02.pdf.

9 See https://www.donaldjtrump.com/policies/trade.

10 See https://www.census.gov/foreign-trade/statistics/highlights/top/top1312yr.html.

11 See The International Trade Commission, Miscellaneous Tariff Bill Petition System (MTBPS) (available at https://mtbps.usitc.gov/external/).

12 See https://dataweb.usitc.gov/.