EU Official Calls for Invalidation of EU–U.S. Safe Harbor Pact

A European Court of Justice (ECJ) advocate general, Yves Bot, has called for the European Union–U.S. Safe Harbor Agreement to be invalidated due to concerns over U.S. surveillance practices (press release here, opinion here). The ECJ has discretion to reject the recommendation, but such opinions are generally followed. A final decision on the issue is expected to be issued late this year or next year.

The issue arises out of the claims of an Austrian law student, Max Schrems, who challenged Facebook’s compliance with EU data privacy laws. (The case is Schrems v. (Irish) Data Protection Commissioner, ECJ C-362/14.) He claims that the Safe Harbor Framework fails to guarantee “adequate” protection of EU citizen data in light of the U.S. National Security Agency’s (NSA) surveillance activities. Although the Irish data protection authority rejected his claim, he appealed and the case was referred to the ECJ.

The European Data Protection Directive prohibits data of EU citizens from being transferred to third countries unless the privacy protections of the third countries are deemed adequate to protect EU citizens’ data. The U.S. and EU signed the Safe Harbor Framework in 2000, which permits companies self-certify to the U.S. Department of Commerce (DOC) annually that they abide by certain privacy principles when transferring data outside the EU. Companies must agree to provide clear data privacy and collection notices and offer opt-out mechanisms for EU consumers.

In 2013, former NSA contractor Edward Snowden began revealing large-scale interception and collection of data about U.S. and foreign citizens from companies and government sources around the globe. The revelations, which continue, have alarmed officials around the world, and already prompted the European Commission to urge more stringent oversight of data security mechanisms. The European Parliament voted in March 2014 to withdraw recognition from the Safe Harbor Framework. Apparently in response to the concern, the Federal Trade Commission (FTC) has taken action against over two dozen companies for failing to maintain Safe Harbor certifications while advertising compliance with the Framework, and in some cases claiming compliance without ever certifying in the first place. For more, see here (FTC urged to investigate companies), here (FTC settles with 13 companies in August 2015), and here (FTC settles with 14 companies in July 2014).

Advocate General Bot does not appear to have been mollified by the U.S. efforts, however. He determined that “the law and practice of the United States allow the large-scale collection of the personal data of citizens of the [EU,] which is transferred under the [S]afe [H]arbor scheme, without those citizens benefiting from effective judicial protection.” He concluded that this amounted to interference in violation of the right to privacy guaranteed under EU law, and that, notwithstanding the European Commission’s approval of the Safe Harbor Framework, EU member states have the authority to take measures to suspend data transfers between their countries and the U.S.

While the legal basis of that opinion may be questioned, and larger political realities regarding the ability to negotiate agreements between the EU and the U.S. are at play, if followed by the ECJ, this opinion would make it extremely difficult for companies to offer websites and services in the EU. This holds true even for many EU companies, including those that may have cloud infrastructures that store or process data in U.S. data centers. It could prompt a new round of negotiations by the U.S. and European Commission to address increased concerns in the EU about surveillance.

Congressional action already underway may help release some tension, with the House Judiciary Committee unanimously approving legislation that would give EU consumers a judicial right of action in the U.S. for violations of their privacy. This legislation was a key requirement of the EU in an agreement in principle that would allow the EU and U.S. to exchange data between law enforcement agencies during criminal and terrorism investigations.

Although the specific outcome of this case will not be known for months, the implications for many businesses are clear: confusion and continued change in the realms of privacy and data security, and uncertainty about the legal rules of the game. Increased fragmentation across the EU may result, with a concomitant need to keep abreast of varying requirements in more countries. Change and lack of harmonization is surely the new normal now.

© 2015 Keller and Heckman LLP

Coming to America: Foreign Manufacturers Looking to Produce in the U.S.

There’s been buzz about Keer Group lately, the Chinese textile company that opened a cotton mill this year in South Carolina.  China has long been seen as the global capital of textile manufacturing, due in part to their low production costs and seemingly endless supply of cheap labor.  But Keer Group found the rising costs in China made it difficult to grow in its hometown of Hangzhou.  Wages there have been steadily increasing, energy costs are rising, and shipping costs are growing higher.  Textile operations in China are actually starting to become unprofitable.  So production was moved to America.   And Keer Group is not alone.  JN Fibers Inc., also of China, is building a plant in South Carolina.  Indian textile manufacturer, ShriVallabh Pittie Group, is building a factory in Georgia.

Why would textile companies from traditionally low cost countries move production to the U.S.?  What’s the allure for these foreign companies?  Isn’t it expensive to operate here as opposed to low wage countries like China and India?  Well, despite the comparatively high wage rate in the U.S., several factors are at play to offset the cost of labor.  Years of low employment mean that Americans are willing to work longer hours and for suppressed wages.  The U.S. is also home to several right-to-work states where union representation is low and workers are not restricted to a single task but rather can set up, operate, and run multiple machines.   But even with a wage gap between the U.S. and low wage countries, the gap is more than compensated for by other savings.

“Except for human labor, all other production factors are cheaper in the U.S.”

“Except for human labor, all other production factors are cheaper in the U.S.”

The U.S. is a political, economic, and infrastructural oasis in an uncertain world.  America benefits from cheap, plentiful, and reliable energy ensuring production facilities can be kept running constantly.  While textile companies in the past have looked to countries such as Bangladesh and India to keep production costs low, economic volatility resulting in unreliable energy sources are disrupting production.  Many plants today are primarily automated, meaning companies rely on the constant energy supply.  What good are cheap utilities when they aren’t stable?

The U.S. has also created incentives to keep costs down for foreign companies looking to relocate.  Government at the local, state, and federal level have eagerly provided infrastructure grants, revenue bonds, and tax credits in order to bring back jobs to economically depressed areas.  Additionally, trade agreements between the U.S. and other low cost countries provide the extra incentive of keeping shipping and logistical costs low.  NAFTA has created duty free zones on imported textiles between the U.S. and several trade partners.  And should the Trans-Pacific Partnership reach an agreement, companies with production in America can take advantage of an expanded pool of countries with tariff reductions, including Vietnam.

Just how difficult is it for a foreign company to establish operations in America?  Not difficult at all.  The U.S. Small Business Administration has provided excellent guidance on the basic steps needed get started.

Businesses in the U.S. are incorporated at the state level, first by registering with the state and then establishing a registered agent with a valid state address to receive legal documents on behalf of the company.  Considerations for the foreign company include which state will be the most attractive in terms of readiness of labor force, land availability, and tax benefits.

International shipping of goods through the U.S. will be regulated at the federal level, requiring specific licenses and permits.  The Department of Commerce’s Trade Information Center and the U.S. Customs and Border Protection provide useful information on U.S. importation and exportation procedures.  Additional considerations include compliance with the Internal Revenue Service, starting by either obtaining an Employment Identification Number or an Individual Taxpayer Identification Number, depending upon the citizenship of the individual establishing the business.  Trade licensing requirements, IRS compliance, and tax credits, including incentives available to businesses through a foreign tax treaty, are all important issues to consider, and if left with any questions, it is always best to consult with a qualified attorney.

Symbol, the struggle for economic power between the United StateThere are numerous benefits for a foreign company to relocate manufacturing operations to the U.S., but there are also important considerations that should be taken into account.  However, navigating the channels of regulations and requirements shouldn’t deter manufacturers from taking advantage of all of that come from setting up shop in America.  Foreign companies are finding that operating in what were traditionally considered to be low cost countries are no longer profitable and are starting to look outside their borders.  And if companies like Keer Group are any indication, for the first time in a long time manufacturing in America is not only a consideration, it’s a serious contender.

© Copyright 2015 Squire Patton Boggs (US) LLP

Trans-Pacific Partnership Negotiations Face Tighter Timeline as Talks Continue

Trade ministers announced that they will continue negotiations over several unresolved provisions of the Trans-Pacific Partnership (TPP) during a four-day meeting in Maui, Hawaii that concluded July 31. Trade ministers representing the 12 Pacific Rim countries included in the free trade deal remain optimistic about negotiations and said in a joint statement that they are “more confident than ever that TPP is within reach.”

trade partnership, negotiations, trading deal, stakeholders, intellectual property

One of the major sticking points reportedly centers around intellectual property protections for biologics. The U.S. reportedly attempted to secure 12 years’ data protection for pharmaceutical companies, while Australia is insisting on five years. Observers suggest the agreement will fall somewhere between five and seven years’ data protection. U.S. stakeholders concerned with a deal that only includes five years of data protection could threaten to round up enough opposition in Congress to stymie the deal.

Other points of contention arose over agricultural issues and the auto industry. The U.S. is pushing for greater access to Canada’s dairy market, but Canada is concerned that could cause instability in its prices. Australia is seeking increased access to the U.S. sugar market, while the U.S. is trying to limit large increases in sugar imports. Meanwhile, the U.S., Canada, Mexico and Japan are hashing out “rule of origin” and other auto industry issues.

Once all 12 trade ministers agree to a deal, Congress will have 90 days to review and approve it. If talks continue beyond August, pushing the review period deep into the fall or winter, the deal is likely to become front and center in the U.S. presidential campaign. Democratic front-runner Hillary Clinton would face intense pressure from labor unions to disavow the deal, along with the 28 House Democrats who supported legislation to fast-track passage of the agreement. It could also become a problem for Canadian Prime Minister Stephen Harper, who is up for re-election in October.

The TPP will govern foreign exports, imports, and investment implicating several major sectors of the U.S. economy, including manufacturing, intellectual property, textiles and apparel, telecommunications, agriculture and others. It will also cover labor, employment, and environmental issues. The TPP will initially cover 12 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. Collectively these countries represent 40 percent of the global economy.

© 2015 Foley & Lardner LLP

BIS Removes Cuba as State Sponsor of Terrorism in Regulations

On July 22, 2015, the Bureau of Industry and Security (BIS), an agency of U.S. Department of Commerce, amended the Export Administration Regulations (EAR) to reflect Cuba’s removal from designation as a State Sponsor of Terrorism. The Secretary of State rescinded Cuba’s designation on May 29, 2015.

cuba_800_11429

As part of Cuba’s removal from designation as a State Sponsor of Terrorism, BIS amended the EAR to remove references in the text associating Cuba with terrorism. It also removes anti-terrorism (AT) license requirements from Cuba. Finally, BIS amended the EAR to remove Cuba from Country Group E:1, although Cuba remains on the Country Group E:2 list.

These amendments to the EAR affect certain license requirements and exceptions that apply to exports to Cuba. Specifically, the EAR apply to items that contain more than a de minimis amount of U.S.-origin content. For exports to most countries, that de minimis amount is 25 percent, but for exports to countries on the Country Group E:1 list, that de minimis amount is 10 percent. Exports of most items to Cuba are now also subject to the 25 percent de minimis rule. Yet, foreign-made items destined for Cuba that incorporate certain U.S.-origin 600 series content continue to be subject to the EAR regardless of level of U.S.-origin content.

Additionally, Cuba’s removal from the Country Group E:1 list makes exports to the country eligible for four new license exceptions including:

  • License Exception Servicing and Replacement of Parts and Equipment (RPL);
  • License Exception Governments, International Organizations, International Inspections Under the Chemical Weapons Convention and the International Space Station (GOV);
  • License Exception Baggage (BAG); and
  • License Exception Aircraft, Vessels and Spacecraft (AVS).

Despite these changes, it is important to remember that Cuba is still subject to a comprehensive embargo. Licenses are still required to export or reexport to Cuba any item subject to the EAR unless authorized by a license exception. Those who would like to export items authorized by license exceptions may only use license exceptions listed in 15 CFR 746.2(a).

©2015 Drinker Biddle & Reath LLP. All Rights Reserved

The Problems and Advantages in Taking Your Company International: A Conversation with Karen Klein, General Counsel to Hotel Tonight, Inc.

In just under two weeks, the 15th Annual Inside Counsel Super Conference kicks off in downtown Chicago. If previous years are any indication, the event will be packed with a diverse group of senior level audience participants. The speaking faculty is comprised of over 80 In-House Counsel, and more than 80 % of the attendees are in house counsel, with 65% at the senior level and above. This event promises to be packed with innovative speakers, fantastic panels and great conversation.

Karen Klein, General Counsel to Hotel Tonight, Inc, took some time to speak with the National Law Review about the upcoming Inside Counsel Conference. She has attended the conference for the last six years, and has been a speaker for the last five. Karen says, “The first year, I was invited by an outside law firm that was co-sponsoring the conference, and I have attended it ever since.” Klein says this conference stands out because of the high quality of the programming. She says, “I find the sessions to be not only informative and the speakers well-versed in their subjects, but the practical examples are invaluable.” Klein suggests that to get the most out of the experience, attendees make an effort to be really “present” during the sessions. She says, “we are all so tied to our phones and have a serious fear of our clients being upset that they can’t reach us 24/7, but it is important to our ongoing professional development to take some time to understand current issues facing our practices.”

Understanding current issues in your industry is important for success, according to Klein. She suggests, “Listen and ask questions. To provide true value to your clients, you have to understand their business. Figure out how they make money and what keeps the CEO awake at night, and what are the biggest threats to success.” Understanding that context and making your legal advice relevant means, “you won’t have to beg for a seat at the table–the management team will want you there.”

This year, Klein will be speaking at the Global Lawyer Forum’s panel, “Contracting Internationally: Do’s and Don’ts” with Roberto Berry Assistant General Counsel, International Affairs and Compliance, Chrysler Group LLC and Patrick M. Sheller, Senior Vice President, General Counsel, Secretary & Chief Administrative Officer, Eastman Kodak Company. The panel is designed to provide an outline of some of the gray areas of working internationally in the contract drafting phase. Klein says, “ we want to provide the audience with a really strong basis for understanding and spotting the issues that their businesses will encounter internationally, as well as some practical advice for how to deal with those issues.”

Klein says, “The biggest challenges companies face internationally are cultural. US Companies in particular really need to understand a local market and have ‘feet on the street’ in the local market to be successful.” Confronting these challenges can lead to some of the greatest benefits of working internationally; according to Klein–new challenges and opportunities the company probably wouldn’t encounter domestically. Klein says, “I think anytime we are forced outside our comfort zone, it expands our minds. . . Seeing things from the perspective of your employees and customers in another region brings new ideas, which ultimately make your products better, and your business stronger.”

Klein has a resume that will resonate with anyone who likes to travel: with positions with Orbitz, Kayak, and Hotel Tonight. Klein got her start as an in-house attorney when she was a third year associate in a corporate law department of a large law firm. She says, “I was working (yet another) M&A transaction and as it closed, I found myself disappointed that I had learned all these things about the company during the diligence phase, and now it was time to move on. Fortunately for me, it was just months later that one of the firm’s biggest clients had just finished an acquisition spree, and they asked me to join their team. I never looked back.” That position led to a position at Orbitz, and it’s been travel for Klein ever since. Klein enjoys working in travel, she says, “Travel is a fun industry. Everyone likes to talk about their travel experiences–good and bad, so I always have interesting cocktail party conversations.”

The 15th Annual Super Conference promises to be another great event packed with opportunities for professional development. Check out the website here to see the agenda and get more information.

Authored by E. Eilene Spear of the National Law Review

The European Court of Justice Overturns, Unfreezes EU Iran Sanctions

Sheppard Mullin 2012

In a series of recent rulings, the European Court of Justice overturned economic sanctions issued by the Council of the European Union (EU) on several Iranian banks and shipping lines.  On September 6 and 16, 2013, the Court halted sanctions on Persia International Bank plc, Bank Refah Kargaran, Export Development Bank of Iran, Post Bank Iran, Iranian Offshore Engineering & Construction Co., Iran Insurance Company, Islamic Republic of Iran Shipping Lines (IRISL), Khazar Shipping Lines, and Good Luck Shipping.  The EU had sanctioned these entities for their support of nuclear proliferation activities in Iran, but the Court determined that the EU lacked sufficient evidence to introduce such sanctions.  The cases are notable for their effect on global sanctions against Iran, although it seems unlikely that U.S. sanctions against Iran would be lifted on similar grounds.

While a full review of the developments in each case would be beyond the scope of this blog article, a few representative matters bear closer scrutiny.  In the case against IRISL, the Court noted that the imposition of sanctions was only permitted where a party had allegedly supported nuclear proliferation.  The Court indicated that sanctions could not be imposed simply based on a risk that  IRISL might provide support for nuclear proliferation in the future.  In particular, the Court determined that, while the EU established that IRISL had been involved in exports of arms from Iran, that activity was not alone sufficient to support the imposition of nuclear sanctions.  As a result, the Court struck down the sanctions against IRISL.

Similarly, in considering sanctions against Iran Insurance Company, the Court noted that the EU had sanctioned the company for insuring the purchase of helicopter spare parts, electronics, and computers with applications in aircraft and missile navigation, which the EU alleged could be used in violation of nuclear proliferation sanctions.  The Court ruled that the EU had relied on “mere unsubstantiated allegations” regarding the provision of insurance services, and annulled the sanctions.

We think these two matters are noteworthy for the types of evidence used to link the activities of the entities to nuclear proliferation.  When viewed in the light of a formal court proceeding, it seems somewhat remarkable that the EU sought to tie the insuring of items including helicopter spare parts to nuclear proliferation at all.  But, as we have discussed previously in this blog, [see May 2013 sanctions article]  economic sanctions against Iran have been broadly construed and applied by the United States and the EU to target industries integral to the functioning of the Iranian economy.  Insofar as a functioning Iranian economy also supports the nuclear development efforts of its government, it may make political sense for the EU and the United States to impose leverage through sanctions.  As a legal matter, however, the European Court of Justice rulings suggest that Court will be loathe to tie restrictions on general economic activity to a statute focused on the specific activity of nuclear proliferation.

In other words, the European Court of Justice seems unlikely to defer to the EU, even where European security is at stake.  This stands in relatively stark contrast to U.S. courts, which have generally shown deference to government activity on issues of national security.[1]

For the time being, U.S. sanctions on Iran and key entities within the Iranian banking and shipping sectors remain in place, with far reaching consequences that will continue to deter Western business from even considering business in Iran.  And ultimately, any warming in diplomatic relations between the United States and Iran will likely be more momentous than judicially vacated sanctions.  But at a minimum, the European Court of Justice has signaled that EU sanctions are subject to standards of proof that cannot be broadly construed to incorporate all types of economic activity.


[1] At least one U.S. court has overturned criminal sanctions charges on individuals by reading regulatory provisions in the accused’s favor due to issues of vagueness in the sanctions regulations. [see Clarity Required: US V. Banki]

Politics and Consequences: An Update on U.S. Sanctions Against Iran

Sheppard Mullin 2012

Since Hassan Rouhani’s election to the Iranian presidency, some U.S. leaders have expressed interest in diplomatic talks with Iran.  It is currently unclear whether any such talks will ever occur, or on what terms.  In the face of ongoing uncertainty, the U.S. sanctions program against Iran has continued to develop in a piecemeal sometimes inconsistent fashion.

More Restrictive Sanctions: Executive Order 13645

On June 3, 2013, President Obama’s Executive Order 13645 authorized sanctions against foreign financial institutions that conduct or facilitate significant transactions in the Iranian Rial or that provide support to Iranian persons on the Specially Designated Nationals (SDN) list.  Under the Executive Order, the Secretary of Treasury may prohibit those financial institutions from opening or maintaining a correspondent or payable through account and may block the institutions’ property in the United States.

Less Restrictive Provisions

Notwithstanding the restrictions in EO 13645, there remains some room for engaging in business with Iran in some sectors.

The Executive Order itself is restricted to certain types of transactions.  A foreign financial institution engaged in transactions involving petroleum products from Iran may be subject to restrictions on its accounts in the United States only if the President of the United States determines there is a sufficient supply of such products from countries other than Iran.  The same sanctions apply to a natural gas transaction only if the transaction is solely for trade between Iran and the country with primary jurisdiction over the foreign financial institution, and any funds owed to Iran as a result of the trade are credited to an account located in the latter country.

The prohibition against significant foreign financial transactions for SDNs does not apply to transactions for the provision of agricultural commodities, food, medicine, or medical devices to Iran, or to transactions involving a natural gas project described in section 603(a) of the Iran Threat Reduction and Syria Human Rights Act of 2012.

On July 25, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) followed in the wake of the Executive Order, issuing a General License for the exportation or reexportation of medicine and basic medical supplies to Iran.  OFAC delineated the scope and limitations of the authorization via a list of frequently asked questions and new guidance, and updated section 560.530(a)(3)(i) of the Iranian Transactions and Sanctions Regulations to reflect the change.

Under the new regulations, the sale of food, medicine, and medical devices by U.S. persons or from the United States to Iran, and the sale of food, agricultural commodities, medicine, and medical devices to Iran by non-U.S. persons are not subject to U.S. sanctions.  The financing or facilitation of such sales by non-U.S. persons do not trigger sanctions either, so long as the transaction does not involve certain specifically proscribed conduct or designated persons (such as Iran’s Islamic Revolutionary Guard Corps or a designated Iranian bank).  Iranian oil revenues held in Central Bank of Iran or non-designated Iranian bank accounts at foreign banks, for example, may be used to finance exports of food, agricultural commodities, medicine, or medical devices to Iran from the country in which the account is held or from any other foreign country.

Separately, On September 10, OFAC issued two new general licenses. General License E authorizes nongovernmental organizations to export or reexport services to or related to Iran in support of specific not-for-profit activities designed to directly benefit the Iranian people.  The enumerated activities include those aimed at basic human needs, post-disaster reconstruction, environmental and wildlife conservation, human rights, and democracy.

General License F permits the importation into the United States, exportation from the United States, or other dealing in Iranian-origin services related to professional and amateur sporting activities and exchanges involving the United States and Iran.  The authorized activities include those related to matches and events, sponsorship of players, coaching, refereeing, and training.

Conclusion

The recent Executive Order and General Licenses highlight a fundamental fact about U.S. sanctions programs: because they are subject to unilateral executive control, changes can be sweeping and abrupt.  It remains to be seen whether the United States will engage in increased diplomacy with Iran.  But what is clear is that shifting geopolitical realities are sure to alter the future course of the Iran sanctions program and to carry real consequences for U.S. and foreign businesses.