Category: Antitrust & Trade Regulation

Can U.S. Companies Insure Against A Trade War?

The recent trade deal between the U.S. and China was welcome news for U.S. companies with investments in China.  The tenuous relationship between the countries, however, continues to cause substantial uncertainty for U.S. investors.  Their concerns are not unique to China—the Trump Administration has taken an aggressive trade stance even with nations usually considered friendly, including Brazil, Argentina, and France.

A growing number of companies are turning to political risk insurance to protect their foreign investments.  Such policies typically cover a variety of commercial losses stemming from political events, including expropriation, political violence, or currency conversion restrictions.

Are political risk policies a valuable tool in a company’s arsenal for mitigating the uncertainties of doing business in China or other countries embroiled in a trade war with the United States?  The answer depends, in large part, on the specific wording of the policy at issue.  There is no standard political risk policy form, and jurisprudence on such policies is extremely limited.  Potential policyholders must evaluate their needs carefully and be strategic during policy placement to ensure they are maximizing potential coverage.  For example:

Expropriation:  Political risk policies may cover losses stemming not only from a government’s outright nationalization or expropriation of a policyholder’s assets, but also from more subtle forms of unlawful discrimination against foreign entities.  The bounds of such coverage, however, are not always clear.  Many policies exclude incidental damages arising from lawful or legitimate acts of governance, which may give rise to disputes between policyholders and insurers as to the nature and motivation of a particular governmental act.

For example, the Chinese Government imposed tariffs and restrictions on U.S. companies doing business in China throughout 2019.  A policyholder seeking coverage for losses suffered due to these measures would argue that the restrictions were retaliatory acts in response to the U.S.-China trade war, meaning that its damages arose from covered acts of discrimination in violation of international law.  An insurer seeking to limit its coverage obligations may argue that China imposed these restrictions based on its view that the companies had violated market rules or otherwise damaged the interests of Chinese companies for noncommercial reasons—in other words, that these were legitimate act of governance taken in the public interest.

Given the lack of case law on the intended scope of expropriation coverage and the fact-intensive nature of disputes over the legitimacy of a particular governmental act, companies should seek to include the broadest possible definition of “expropriation” in their policy and to clarify the bounds of any exclusions.

Political Violence:  In addition to coverage for expropriation and related governmental acts, political risk policies also may provide coverage for losses stemming from physical damage to property due to protests, riots, or other acts of violence intended to achieve a political objective.  While U.S. investors may not commonly associate trade wars with physical violence, recent protests and riots over economic issues in countries such as Chile and Ecuador demonstrate the potential for severe economic turmoil (a common result of any trade war) to cause such violence.  As a result, U.S. companies with warehouses, offices, or other property in countries facing aggressive trade restrictions by the U.S., or in any nation suffering from substantial economic uncertainty, may find such coverage appealing.

The potential benefit of political violence coverage may depend, in large part, on how a policy proposes to determine the value of any damaged property or resulting financial losses.  Potential policyholders should ensure, for example, that a loss is valued pursuant to objective accounting standards and/or by a neutral third-party, as opposed to the insurer, who may have an interest in minimizing its liability.

Currency Inconvertibility:  A third component of political risk insurance is currency inconvertibility coverage—i.e., coverage for losses arising from a policyholder’s inability to convert currency due to exchange restrictions posed by a foreign government.  For example, such coverage might apply if a policyholder is unable to obtain repayment of a loan to a Chinese entity because of new restrictions by the Chinese Government on conversion of local currency to U.S. dollars or the transfer of funds to U.S. banks.  U.S. companies with investments in countries facing particularly extreme economic instability, such as Venezuela, may benefit most from such coverage, as those countries are most at risk for collapse of their currency exchange system.

As with political violence coverage, a policy’s proposed standards for valuing a currency inconvertibility loss are once again crucial to maximizing a policyholder’s protection.  Policies often calculate the value of a policyholder’s loss using the foreign country’s exchange rate on the date of loss.  In such scenarios, policyholders may benefit from defining the “date of loss” as occurring the first time the policyholder is unable to convert currency, as opposed to after a waiting period has occurred or after the insured has made multiple conversion attempts.  This may minimize the risk that the value of a covered loss decreases if the exchange rate in the country plummets while the insured fulfills other conditions for coverage.

Political risk policies likely cannot insulate U.S. companies from the full impact of a global trade war or other politically-inspired disruptions.  However, U.S. businesses can maximize the benefits of such coverage through careful policy drafting and strategic evaluation of their individual risk profile.

© 2020 Gilbert LLP

ARTICLE BY Emily P. Grim of Gilbert LLP.
More on recent US trade negotiations on the National Law Review Antitrust Law and Trade Regulation page.

Apollo Settles Alleged Sanctions Violations: Aircraft Lessors Pay Attention

The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury has broad delegated authority to administer and enforce the sanctions laws and related sanctions programs of the United States. As a key component of its enforcement authority, OFAC may investigate “apparent violations” of sanctions laws and assess civil monetary penalties against violators pursuant to five statutes, including the Trading with the Enemy Act and the International Emergency Economic Powers Act.1

An “apparent violation” involves “conduct that constitutes an actual or possible violation of U.S. economic sanctions laws.”2 An OFAC investigation of an “apparent violation” may lead to one or more administrative actions, including a “no action” determination, a request for additional information, the issuance of a cautionary letter or finding of violation, the imposition of a civil monetary penalty and, in extreme cases, a criminal referral.3 Investigations of apparent violations by OFAC often lead to negotiated settlements where a final determination is not made as to whether a sanctions violation has actually occurred.4

Upon the conclusion of a proceeding that “results in the imposition of a civil penalty or an informal settlement” against or with an entity (as opposed to an individual), OFAC is required to make certain basic information available to the public.5 In addition, OFAC may release on a “case-by-case” basis “additional information” concerning the penalty proceeding,6 and it often does. Such additional information will sometimes include informal compliance guidance, cautionary reminders and best practices recommendations. Such information is routinely consumed by corporate compliance officers seeking fresh insight on ever-evolving compliance and enforcement trends, particularly in the context of proceedings relating to industries with which they are involved.

On November 7, 2019, OFAC released enforcement information that has caught the attention of the aircraft leasing community, particularly U.S. aircraft lessors and their owned or controlled Irish lessor subsidiaries.7 The matter involved a settlement by Apollo Aviation Group, LLC8 of its potential civil liability for apparent violations of OFAC’s Sudanese Sanctions Regulations (SSR) that existed in 2014–5.9 Although the amount of the settlement was relatively modest, the enforcement activity by OFAC in the proceeding has attracted scrutiny by aircraft lessors because, for the first time in recent memory, a U.S. aircraft lessor has paid a civil penalty to OFAC for alleged sanctions violations.

At the time of the apparent violations, Apollo was a U.S. aircraft lessor which became involved in two engine leasing transactions that came back to haunt it.

In the first transaction, Apollo leased two jet engines to a UAE lessee which subleased them to a Ukrainian airline with which it was apparently affiliated. The sublessee, in turn, installed both engines on an aircraft that it “wet leased”10 to Sudan Airways, which was on OFAC’s List of Specially Designated Nationals and Blocked Persons within the meaning of the “Government of Sudan.” Sudan Airways used the engines on flights to and from Sudan for approximately four months before they were returned to Apollo when the lease ended. Meanwhile, in a separate transaction, Apollo leased a third jet engine to the same UAE lessee, which subleased the engine to the same Ukrainian airline, which installed the engine on an aircraft that it also wet leased to Sudan Airways. Sudan Airways used the third engine on flights to and from Sudan until such time as Apollo discovered how it was being used and demanded that the engine be removed from the aircraft.

Both leases between Apollo and its UAE lessee contained restrictive covenants “prohibiting the lessee from maintaining, operating, flying, or transferring the engines to any countries subject to United States or United Nations sanctions.”11 Thus, by allowing the engines to be installed by its sublessee on aircraft that were eventually wetleased to Sudan Airways, and flown to and from Sudan during the country’s embargo, the lessee presumably breached the operating restrictions and covenants imposed by Apollo in the leases. Moreover, once Apollo learned that the first two engines had been used, and the third engine was being used, for the benefit of Sudan Airways, it demanded that the third engine be removed from the aircraft that the sub-lessee had wet-leased to Sudan Airways, and this was done.12

One might reasonably conclude from these facts that Apollo acted like a good corporate citizen. So what did Apollo do wrong from a sanctions compliance standpoint?

OFAC stated that Apollo may have violated section 538.201 of the SSR, which at the time “prohibited U.S. persons from dealing in any property or interests in property of the Government of Sudan,”13 as well as section 538.205 of the SSR, which at the time “prohibited the exportation or re-exportation, directly or indirectly, of goods, technology or services, from the United States or by U.S. persons to Sudan.”14

What are the takeaways and possible lessons to be drawn by aircraft lessors from this settlement based upon these alleged violations and the facts upon which they were based?

First, according to OFAC, Apollo did not “ensure” that the engines “were utilized in a manner that complied with OFAC’s regulations,” notwithstanding lease language that effectively required its lessee to comply.15 OFAC is clearly suggesting here that aircraft lessors have a duty to require sanctions compliance by their lessees. And, in view of the fact that many sanctions programs are enforced on a strict liability basis, OFAC’s comment that Apollo failed to “ensure” compliance by its lessee and sublessees makes sense. Apollo was not in a position to avoid civil liability by hiding behind the well-drafted language of its two leases. If a sanctions violation occurred for which Apollo was strictly liable, the mere fact that its lessee’s breach of the lease was the proximate cause of the violation would not provide a safe harbor.

As an example of Apollo’s alleged failure to “ensure” legal compliance, OFAC observed that Apollo did not obtain “U.S. law export compliance certificates from lessees and sublessees,”16 a comment which is somewhat puzzling. To our knowledge, there is nothing in the law requiring a lessor to obtain export compliance certificates, at least not in circumstances where an export or re-export license is not otherwise required in connection with the underlying lease transaction. Moreover, as a practical matter, it would be difficult, at best, for an aircraft lessor to force the direct delivery of certificates from a sublessee or sub-sub-lessee with whom it lacks privity of contract. In view of the foregoing, one assumes that OFAC was looking for Apollo to install procedures by which its lessee would self-report on a regular basis its own compliance (and compliance by downstream sublessees) with applicable export control laws and the relevant sanctions restrictions contained in the lease.

Second, OFAC found that Apollo “did not periodically monitor or otherwise verify its lessee’s and sublessee’s adherence to the lease provisions requiring compliance with U.S. sanctions laws during the life of the lease.”17 In this regard, OFAC observed that Apollo never learned how and where its engines were being used until after the first two engines were returned following lease expiration and a post-lease review of engine records, including “specific information regarding their use and destinations,” actually conducted.

In view of the foregoing, OFAC stressed the importance of “companies operating in high-risk industries to implement effective, thorough and on-going, risk-based compliance measures, especially when engaging in transactions concerning the aviation industry.”18 OFAC also reminded aircraft and engine lessors of its July 23, 2019, advisory warning of deceptive practices “employed by Iran with respect to aviation matters.”19 While the advisory focused on Iran, OFAC noted that “participants in the civil aviation industry should be aware that other jurisdictions subject to OFAC sanctions may engage in similar deception practices.”20 Thus, according to OFAC, companies operating internationally should implement Know Your Customer screening procedures and “compliance measures that extend beyond the point-of-sale and function throughout the entire business of lease period.”21

As a matter of best practices, aircraft lessors should implement risk-based sanctions compliance measures throughout the entirety of a lease period, and most do. Continuous KYC screening by lessors of their lessees and sublessees is a common compliance practice. Periodic reporting by lessees as to the use and destination of leased aircraft and engines appears to be a practice encouraged by OFAC.22 Lessors can also make it a regular internal practice to spot check the movement of their leased aircraft through such web-based platforms as Flight Tracker and Flight Aware. If implemented by lessors, such practices may enable early detection of nascent sanctions risks and violations by their lessees and sublessees.

Finally, OFAC reminded lessors that they “can mitigate sanctions risk by conducting risk assessments and exercising caution when doing business with entities that are affiliated with, or known to transact business with, OFAC-sanctioned persons or jurisdictions, or that otherwise pose high risks due to their joint ventures, affiliates, subsidiaries, customers, suppliers, geographic location, or the products and services they offer.” Such risk assessment is an integral part of the risk-based sanctions compliance program routinely encouraged by OFAC, as outlined in its Framework for OFAC Compliance Commitments on May 2, 2019.23 For aircraft and engine lessors, conducting pre-lease due diligence on the ownership and control of prospective lessees and sublessees, as well as the business they conduct, the markets they serve, the equipment they use and the aviation partners with whom they engage, are key to identifying and understanding the sanctions risks that a prospective business opportunity presents.

1 See U.S. Department of the Treasury, Office of Foreign Assets Control, Inflation Adjustment of Civil Monetary Penalties, Final Rule, 84 Fed. Reg. 27714, 27715 (June 14, 2019).

2 31 C.F.R. Part 501, Appendix A, Section I.A.

3 31 C.F.R. Part 501, Appendix A, Section II.

4 31 C.F.R. Part 501, Appendix A, Section V.C.

5 31 C.F.R. §501.805(d)(1). Such information includes “(A) [t]he name and address of the entity involved, (B) [t]he sanctions program involved, (C) A brief description of the violation or alleged violation, (D) [a] clear indication whether the proceeding resulted in an informal settlement or in the imposition of a penalty, (E) [a]n indication whether the entity voluntarily disclosed the violation or alleged violation to OFAC, and (F) [t]he amount of the penalty imposed or the amount of the agreed settlement.” Id. OFAC communicates all such information through its website. 31 C.F.R. § 501.805(d)(2).

6 31 C.F.R. § 501.805(d)(4).

7 See OFAC Resource Center, Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Apollo Aviation Group, LLC (Nov. 7, 2019) (https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Page…) (the Settlement Announcement).

8 In December 2018, Apollo was acquired by The Carlyle Group and currently operates as Carlyle Aviation Partners Ltd. According to the Settlement Announcement, neither The Carlyle Group nor its affiliated funds were involved in the apparent violations at issue. See id. at 1 n.1.

9 See 31 C.F.R. Part 538, Sudanese Sanctions Regulations (7-1-15 Edition). Note that most sanctions with respect to Sudan were effectively revoked by general license as of October 2, 2017, thereby authorizing transactions previously prohibited by the SSR during the time period of the apparent violations by Apollo. However, as is true when most sanctions programs are lifted, the general license issued in the SSR program did not “affect past, present of future OFAC enforcements or actions related to any apparent violations of the SSR relating to activities that occurred prior to the date of the general license.” Settlement Announcement at 1 n.2. See also OFAC FAQ 532 (https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#sudan_whole). 

10 A “wet lease” is “an aviation leasing arrangement whereby the lessor operates the aircraft on behalf of the lessee, with the lessor typically providing the crew, maintenance and insurance, as well as the aircraft itself.” See Settlement Announcement at 1 n.3.

11 Id. at 1.

12 Unfortunately, Apollo did not learn that the first two engines were used in violation of lease restrictions until they were returned following lease expiration and it conducted a post-lease review of the relevant engine records. 

13 The alleged application of section 538.201 to Apollo in the circumstances confirms the broad interpretive meaning that OFAC often ascribes to terms such as “interest,” “property,” “property interest” and “dealings,” which appear in many sanctions programs.

14 The alleged application of section 538.205 to Apollo in the circumstances suggests that a U.S. lessor of aircraft and jet engines may be tagged with the “re-export” of such goods and related services from one foreign country to another, notwithstanding the existence of a contractual daisy-chain of lessees, sub-lessees, and/or wetlessees that actually direct and control such flight decisions. In the context of U.S. export control laws, the Export Administration Regulations (EAR) define the term “re-export” to include the “actual shipment or transmission of an item subject to the EAR from one foreign country to another foreign country, including the sending or taking of an item to or from such countries in any manner.” 15 C.F.R. § 734.14(a)(1). Thus, for export control purposes, the flight of an aircraft subject to the EAR from one foreign county to another foreign country constitutes a “re-export” of the aircraft to that country. 

15 Settlement Announcement at 1.

16 Id.

17 Id., at 1–2.

18 Id. at 3. (emphasis added).

19 Id. See OFAC, Iran-Related Civil Aviation Industry Advisory (July 23, 2019) (https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20190723.aspx)

20 Id.

21 Id. (emphasis added).

22 In Apollo, OFAC reacted favorably to certain steps alleged to have been taken by Apollo to minimize the risk of the recurrence of similar conduct, including the implementation of procedures by which Apollo began “obtaining U.S. law export compliance certificates from lessees and sublessees.” Id.

23 See https://www.treasury.gov/resource-center/sanctions/Documents/framework_ofac_cc.pdf.

© 2019 Vedder Price

ARTICLE BY John E. Bradley of Vedder Price.
More sanctions actions on the National Law Review Antitrust & Trade Regulation law page.

U.S./China Trade “Deal” Short on IP/Trade Secret Specifics

With the announcement last week of a tentative partial trade agreement with China, the U.S. appears to be headed to a somewhat easing of tensions between the two superpowers.  Terms of the agreement are vague, with references to a reduction in tariffs, increase in agricultural purchases by China, and agreements to return to the bargaining table.

What is missing, though, are references to increases in protection of U.S. intellectual property: trade secrets, patents, copyrights, and trademarks, long espoused by the U.S.  This silence is in stark contrast to the stated goal of the U.S. that protection of U.S. intellectual property in China is among the key components to a successful and permanent trade deal.

The importance of such protection has been made manifest in several recent events.  The National Association of Manufacturers was hacked over the summer and blame was placed by investigators on Chinese nationals.  Earlier in the year, a former employee of a U.S. cast iron plant was sentenced to one year in prison after being arrested at the airport, en route to China with files of confidential information of his former employer.  Furthermore, China’s trademark register is full of foreign trademarks registered in China by its citizens.

China apparently has verbally committed as a part of an overall trade package to tighten up enforcement efforts in the IP arena.  But how does China quantify that commitment?  Such requires a change in the Chinese government’s mindset, its enforcement policies, and its recognition of the protectability of foreign trade secrets and other IP rights.  None of these can be reduced to tariff percentages, bushels or other common trade terms.  What can China offer in the way of a concrete plan to bolster protection of foreign confidential information?  Indeed, the silence of the parties as to this important issue is probably an indication of the difficulty the parties are having in reaching a verifiable agreement on IP.  With trust levels between the nations at their nadir, one can easily see how resolution of the IP protection issue may be a major stumbling block to a lasting trade agreement.  Will it become prohibitive?  Time will tell.

© 2019 Jones Walker LLP

More on IP agreements on the National Law Review Intellectual Property law page.

World Trade Organization Approves U.S. Tariffs on European Union Goods to Counteract Civil Aviation Subsidies

The World Trade Organization (WTO) has approved U.S. duties on $7.5 billion in products from the European Union (EU) after ruling that the EU had unfairly subsidized the production of large civil aircraft, such as those produced by Airbus. The U.S. Trade Representative (USTR) will enforce 10 percent duties on imports of certain aircraft and 25 percent duties on imports of other goods (including agricultural products, apparel, machinery, and other products) beginning October 18, 2019.

The EU plans to impose retaliatory tariffs on $20 billion of U.S. exports in response to subsidies allegedly provided to American plane manufacturer Boeing. However, the EU will have to wait for WTO approval in separate proceedings. The United States and the EU have been involved in WTO dispute settlement proceedings regarding subsidies for large civil aircraft since 2004.

Duties of 10 percent apply to imports of passenger and cargo aircraft from France, Germany, Spain, and the United Kingdom (where the majority of Airbus production is based), provided that they have an unladen weight exceeding 30,000 kg.1

Duties of 25 percent apply to imports of other products from all EU member states (or a subset of these member states, depending on the product category). These products include certain cheeses, pork, coffee, seafood, fruit, dairy spreads, wine, whisky, apparel, bedding, optical instruments, appliances, tools, folding knives, and magnets.

Military aircraft, civil helicopters, and parts or components of civil aircraft are not subject to the duties.2

1 Examples of subject aircraft over 30,000 kg are regional jets capable of seating more than 100 passengers (such as the Airbus A220) and any larger aircraft (including long-haul, wide-body jets). Smaller aircraft, including recreational aircraft, private jets, most turboprop aircraft, and most regional jets with a capacity of fewer than 100 passenger, have an unladen weight of less than 30,000 kg and are excluded.

2 Airbus has production facilities in the United States, that rely on components imported from the EU. Additionally, some EU companies produce certain components of military aircraft for export to the United States.

©2019 Drinker Biddle & Reath LLP. All Rights Reserved

For more on international trade, see the National Law Review Antitrust & Trade Regulation or Global law pages.

Big Food Price-Fixing Update: Court Certifies Three Putative Classes in Packaged Seafood Litigation

What started out as a proposed merger between two of the largest packaged seafood manufacturers spawned a lengthy criminal investigation into antitrust violations in the tuna industry by the Department of Justice (DOJ) and multiple class and individual civil lawsuits. After four years of litigation, a major development in the class action lawsuits occurred– the Court certified three putative classes.

In 2015, the Department of Justice investigated a proposed merger between Thai Union Group P.C.L. (the parent company of Chicken of the Sea) and Bumble Bee Foods LLC. As the DOJ’s civil attorneys reviewed information related to the merger, they discovered materials that appeared to raise criminal concerns.[1]

Chicken of the Sea then “blew the whistle” to the DOJ regarding their anticompetitive conduct. This admission helped DOJ reach plea agreements with two other manufacturers, Bumble Bee[2] and Starkist,[3] as well as three packaged seafood executives—two from Bumble Bee[4],[5] and one from Starkist[6]. In connection with its guilty plea, Bumble Bee agreed to pay a $25 million fine, while Starkist’s fine is still pending. Bumble Bee’s CEO has also been indicted, and faces up to 10 years in a federal penitentiary. [7]

Now, the tuna manufacturers face a new challenge in the related civil actions. In 2015, on the heels of the DOJ investigation, three separate class actions were filed in the Southern District of California. Plaintiffs alleged that Defendants took part in various forms of anti-competitive conduct, including agreeing to fix certain net and list prices for packaged tuna. Plaintiffs alleged that the conspiracy began as early as November of 2010 and lasted until at least December 31, 2016.

On July 30, 2019, Judge Janis L. Sammartino granted the respective Motions for Class Certification filed by the Direct Purchaser Plaintiffs, as well as the two indirect classes–the Commercial Food Preparer Plaintiffs, and the End Payer Plaintiffs.[8] Judge Sammartino found that each class had satisfied Rule 23’s requirements and—contrary to the Defendants arguments—that common issues predominate over individualized issues within each class. For example, Plaintiffs contended that common evidence exists that would be used to prove the existence and scope of Defendants’ purported price fixing conspiracy.

The certification orders represent a major victory for each of the classes. They can now proceed to summary judgment and trial without any concern that their claims may be narrowed due to the mechanics of the proposed class. While dispositive motions are scheduled to be submitted later this month, no trial date is currently set. With certification rulings issued and merits briefing on the horizon, renewed settlement discussions are likely to come.

[1] https://www.justice.gov/atr/division-operations/division-update-spring-2017/civil-investigations-uncover-evidence-criminal-conduct

[2] https://www.justice.gov/opa/pr/bumble-bee-agrees-plead-guilty-price-fixing

[3] https://www.justice.gov/opa/pr/starkist-co-agrees-plead-guilty-price-fixing

[4] https://www.justice.gov/opa/pr/packaged-seafood-executive-agrees-plead-guilty-price-fixing-conspiracy

[5] https://www.justice.gov/opa/pr/first-charges-brought-investigation-collusion-packaged-seafood-industry

[6] https://www.justice.gov/opa/pr/former-packaged-seafood-executive-pleads-guilty-price-fixing

[7] https://www.justice.gov/opa/pr/bumble-bee-ceo-indicted-price-fixing

[8] Case No.: 15-MD-2670 JLS (MDD) United States Court of Southern District of California

© 2019 Bilzin Sumberg Baena Price & Axelrod LLP
This article was written by Jerry Goldsmith and Lori Lustrin of Bilzin Sumberg.
For more food industry news, see the Biotech, Food & Drug page on the National Law Review.

U.S. Announces Possible Retaliatory Tariffs on European Union for Airbus Subsidies

The Office of the U.S. Trade Representative (USTR) announced in a Federal Register notice published July 5 that the agency is considering increasing duties on certain goods from the European Union (EU). This move is connected to a long-running World Trade Organization (WTO) dispute involving EU subsidies for Airbus, the aircraft manufacturing company.

The USTR has invited public comments on the proposed list and will hold a public hearing on Aug. 5, 2019.

Requests to appear at the hearing are due to the USTR by July 24, and written comments are due by Aug. 5. The public comment and hearing process will provide importers of goods from the EU, as well as domestic producers that compete with EU producers, the opportunity to be heard with regard to the products that may be subject to tariffs.

In April 2019, the USTR published a preliminary list of goods from the EU that could be targeted with tariffs, which included aircraft, motorcycles and wine. The July 5 list contains additional products, including whiskey, coffee, olives, pasta, cheese, pork, and metals, among other items. The goods on both lists are collectively worth about $25 billion of imports per year.

The tariffs stem from a WTO case filed by the United States in 2004, which was resolved by the WTO Appellate Body in 2011. In that case, European Communities and Certain member States — Measures Affecting Trade in Large Civil Aircraft (DS316), the Appellate Body found that certain EU subsidies for Airbus failed to comply with the WTO’s Agreement on Subsidies and Countervailing Measures (SCM Agreement).

The EU made certain changes to its subsidy regime in response to the Appellate Body’s decision, but the U.S. later asked the WTO to determine that the EU had not fully complied with the decision. That request led to another Appellate Body decision published in May 2018, in which the Appellate Body agreed with the U.S. that the EU was still not in compliance with the SCM Agreement.

The WTO is expected to determine the amount of retaliatory tariffs the United States can impose sometime this summer, and the April and July 2019 tariffs proposed by the USTR are likely being prepared in anticipation of the WTO decision.

 

© 2019 BARNES & THORNBURG LLP
For more from the Office of the US Trade Representative see the National Law Review page on Antitrust & Trade Regulation.

FTC Charges Two Japanese Corporations with Alleged HSR Avoidance Scheme

Two Japanese corporations each agreed to pay $2.5 million to settle Federal Trade Commission (“FTC”) charges of violating the premerger notification and waiting period requirements under the Hart-Scott-Rodino (“HSR”) Act.

According to the FTC’s complaint (the “Complaint”), the scheme began when an independent investigation in July 2015 (triggered by an earlier investigation by financial regulators) publicly revealed long-running financial irregularities within Toshiba Corporation (“Toshiba”) and that Toshiba had been overstating its profits by billions. To strengthen its financial statement for FY 2015, Toshiba attempted to sell its subsidiary Toshiba Medical Systems Corporation (“TMSC”), which conducts substantial business in the United States, before the end of FY 2016 (March 31, 2016).  However, Toshiba did not resolve the TMSC sales process in a timely manner and found that, by early 2016, it would be almost impossible to file premerger notifications in several jurisdictions, including the United States, and receive premerger clearances in time.

To complete the acquisition before the end of FY 2016, the Complaint alleges that Toshiba and Canon Inc. (“Canon”), one of the potential bidders, devised a plan to (i) enable Canon to acquire TMSC, (ii) allow Toshiba to recognize proceeds from the sale by the end of FY 2016, and (iii) avoid filing the notification and observing the waiting period required by the HSR Act.  In March 2016, the companies completed this multi-step process as follows:

  1. Toshiba and Canon created a special purpose company, MS Holding Corporation (“MS Holding”), to use as the alleged HSR avoidance device.
  2. Toshiba rearranged the corporate ownership structure of TMSC by creating (i) new classes of voting shares, (ii) a single non-voting share with rights custom-made for Canon, and (iii) options convertible to ordinary shares.
  3. Toshiba sold TMSC’s non-voting share and newly created options to Canon for $6.1 billion while simultaneously transferring TMSC’s voting shares to MS Holding for a nominal payment of $900.
  4. Canon later obtained formal control of TMSC’s voting shares by exercising its options in December 2016.

The Complaint concluded that the companies were hiding the “true nature of the acquisition” because Canon, and not MS Holding, (i) bore the risks/benefits of TMSC and (ii) became the beneficial owner of TMSC in March 2016 when it paid Toshiba $6.1 billion.

According to the Complaint, the scheme devised by Toshiba and Canon “had no purpose” other than to complete the sale of TMSC prior to March 31, 2016, and avoid the HSR Act’s waiting period requirements.  The Complaint asked the Court to assess each Defendant a civil penalty of at least $6,360,000.

According to the proposed Final Judgement, each Defendant will pay a civil penalty of $2.5 million.  The settlement also requires Defendants to establish and maintain a compliance program to address the alleged violations and comply with inspection and reporting requirements, among other imposed obligations.

Why does this matter?

Unlike most HSR penalty cases, this one did not allege a mistaken filing analysis but rather an alleged HSR Rule 801.90 (“Transactions or devices for avoidance”) scheme.  A few notable takeaways:

  • Investment funds sometimes structure funds such that voting rights are given to the fund manager and economic rights given to the investors. This case stands for the proposition that, in such instances, the FTC will look through the formal division of voting/nonvoting securities to the substance of who has beneficial ownership of the shares (risk of gain and loss, etc.).
  • Although the statute says that “no person shall acquire” voting securities or assets without first making the required filing and observing the appropriate waiting period, the government here obtained voluntary civil penalties from the seller as well as from the buyer. When analyzing which party bears the risk of not filing HSR for a transaction, this case may be evidence that both sides bear the risk equally, at least in an 801.90 context.
  • Also note that, although the Complaint asks the court to assess each defendant a civil penalty of “at least $6,360,000,” the government accepted a settlement of $2.5 million each. Given the parties’ apparent decision that paying a potential civil penalty for not fiing an HSR notification was an acceptable cost of doing business, it seems that, with a fine of less than 1% of the $6.1 billion deal value, the regulators may be encouraging rather than discouraging such risk assessments despite having brought this case.

What happens next?

Companies and individuals should carefully determine whether they must observe the HSR Act’s notification and waiting period requirements before consummating their transactions in order to avoid fines of up to $42,530 daily (adjusted annually).  HSR rules and filing obligations can be complex and may change through amendments to the regulations or through formal and informal interpretations issued by the FTC.  Experienced HSR counsel should be consulted to determine if an acquisition may trigger a filing requirement and, if so, if an exemption is available.

© Copyright 2019 Cadwalader, Wickersham & Taft LLP
Read more on FTC Trade Regulation on the National Law Review Antitrust & Trade Regulation page.

 

U.S. Agencies Implement Latest Trump-Cuba Policy Changes

On May 30, 2019, the Office of Foreign Assets Control (OFAC) amended the Cuban Assets Control Regulations (Cuba Regulations), 31 C.F.R. Part 515 (2019), removing authorization for group people-to-people education travel to Cuba. Certain previously authorized group people-to-people education travel may continue to be authorized under a grandfathering provision that will also be added to the regulation. The revisions are effective as of June 5, 2019.

Importantly, the revocation reflects the Trump administration’s significant shift in policy towards Cuba, as the revisions implement changes restricting non-family travel first announced by National Security Advisor John Bolton in an April 17, 2019, foreign policy address. Under an earlier tightening of restrictions in 2017, OFAC had only restricted the General License for group people-to-people travel to require such travel be conducted by organizations subject to U.S. jurisdiction (see previous GT Alert, U.S. Implements President Trump’s Cuba Policy), while this latest move removes the authorization entirely.

Previously authorized group people-to-people travel will be eligible for continued authorization under the grandfathering provision if the traveler has already completed at least one travel-related transaction (such as purchasing a flight or reserving an accommodation) prior to June 5, 2019.

In conjunction with the above, the Bureau of Industry and Security (BIS) amended the Export Administration Regulations (EAR) license exceptions and its licensing policies to “generally prohibit non-commercial aircraft from flying to Cuba and passenger and recreational vessels from sailing to Cuba.”

The License Exception Aircraft, Vessels and Spacecraft (AVS) in EAR § 740.15 has been amended by BIS to remove private and corporate aircraft, cruise ships, sailboats, fishing boats, and other similar aircraft and vessels from eligibility for the license exception. This means that all such aircraft and vessels subject to the EAR may no longer be exported or reexported to Cuba under the AVS exception, and operators will instead need to apply for a BIS license.

The following types of aircraft and vessels remain eligible for License Exception AVS: 1) commercial aircraft operating under Air Carrier Operating Certificates and other Federal Aviation Administration certificates; 2) authorized air ambulances; and 3) cargo vessels for hire for use in transportation of separately authorized items.

Parties that intend to travel to Cuba or to provide Cuba-related transportation services should carefully review the revised regulations to determine whether the new measures impose licensing requirements or other compliance obligations. Parties with previously scheduled group people-to-people travel to Cuba may wish to check the dates of their travel-related transactions and confirm that at least one purchase was made prior to June 5, 2019.

Although these latest revisions do not affect the remittance allowances permitted under the Cuba Regulations, Ambassador Bolton specifically mentioned in the April 17 speech that new restrictions on remittances will be forthcoming. Interested parties should, therefore, expect the restrictions on remittances to be implemented in the near future.

 

©2019 Greenberg Traurig, LLP. All rights reserved.

Trade Trouble – East, West, and South, But North is Settled For Now!

Agriculture Secretary Perdue recently stated the trade damages to be addressed in a new round of farm aid is $15 to $20 billion! The general press is replete with stories about how, as these tariffs continue, companies are making sourcing changes that will be hard to reverse. So, what is the latest news?

First, there is trade with China. It seems clear that unless there is a breakthrough at the G-20 meeting in Tokyo, or shortly thereafter, the anecdotal headaches we hear about will get far more costly. The American Chamber of Commerce in China and the American Chamber of Commerce in Shanghai conducted a survey before List 3 was announced. Even at that point, American companies operating in China acknowledged higher production costs, decreased demand for products, reduced staffing, reduced profits, increased inspections at importation, increased bureaucratic oversight and regulatory scrutiny, slower approval of licenses and permits, higher product rejections, and increasing plans to relocate (but not back to the U.S.).

On a point one can consider only marginally helpful, those with goods on List 3 now have until June 14th to file their entries. To be clear, the goods still must have left China before May 10, and the entry filed no later than June 14th for the 10% to apply. Otherwise, you pay the 25%.

On a somewhat more positive note, if you found the May 21, 2019 Federal Register notice, it published the submission by the U.S. Trade Representative (USTR) to the Office of Management and Budget of a request for expedited approval of a form to be used for List 3 exclusion requests. In that notice, USTR stated it expected the window to open for List 3 exclusion requests around June 30, 2019, which is 10 days after the Tokyo G-20 meeting. If they have not already done so, companies would be wise to start the data gathering process. Among the information to be submitted are product details, whether the product or one comparable can be purchased in the U.S. or other sources outside China, the value and quantity of the product imported in 2017, 2018 and Q1 2019 distinguished by sourcing from China, other third countries and domestically, the degree of severe economic harm caused by the tariffs, and whether or not the applicant submitted any exclusion requests regarding products on List 1 or 2. Those who have prepared exclusion requests for goods on Lists 1 and 2 will instantly recognize the data requirements.

Complicating U.S.-China relations further, on May 15, 2019, a Presidential Document was issued entitled Securing the Information and Communications Technology and Services Supply Chain. It forms the framework permitting the Administration to name companies barred from doing business with U.S. entities on national security grounds. On May 21, 2019, the Bureau of Industry and Security published a Federal Register notice adding Huawei Technologies Co., Ltd. and various affiliates (68 in total) to the Entity List on the ground there is reasonable cause to believe that Huawei “has been involved with activities contrary to the national security or foreign policy interests of the United States.” A May 22, 2019 Federal Register notice reversed that position and issued a Temporary General License effective between May 20, 2019 and August 19, 2019 for these same entities. See Supplement 7 to 15 CFR part 744.

Underscoring that tit-for-tat is very real, China announced on June 1, 2019 the creation of its own “unreliable” entities list. The initial rollout of this new policy took the form of a press briefing. That coverage made clear the criteria which China will rely upon is typically opaque: “foreign enterprises, organizations and individuals could land on this list because they do not obey market rules, violate contracts and block or cut off supply for non-commercial reasons, severely damage the legitimate interests of Chinese companies” or “pose a threat or potential threat to national security.” Almost immediately thereafter, it was announced that FedEx is under investigation in China for misdelivering some packages for Huawei (including returning them to sender or improperly routing them to the U.S.). China stated the purpose of the “unreliable entities list” was to “protect international economic and trade rules and the multilateral trading system, to oppose unilateralism and trade protectionism, and to safeguard China’s national security, social and publish interests,” according to a Ministry of Commerce spokesman.

Then there is the issue of China’s supply of rare earth minerals. China’s official press points out it is only a matter of time before China rolls out a plan to severely limit its exports of these metals which are used to make a variety of electronic products or accessories (including lithium batteries) along with items for U.S. military purposes such as to manufacture night vision goggles, precision-guided weapons and communications/GPS equipment. The latest numbers show that 52% of these metals are found in China and Russia (neither is exactly a friend to the U.S. right now), whereas 18% can be found in Brazil, but only about 1% in the U.S.

Add to this the announcement on May 30th, there will be tariffs imposed on “all goods imported from Mexico.” Even a few days later the most basic questions remain unanswered. Does this statement literally mean all goods from Mexico? What about American products returned which are duty free because unchanged? How about American products used to assemble the final product in Mexico but qualifying for duty free on the American components in the final product? [For you trade nerds – think 9801 and 9802.] What about goods which are of not of Mexican origin? Or are NAFTA qualifying?

Right now, all we have is the timeline – 5% on June 10%, 10% on July 1, 15% on August 1, 20% on September 1 and 25 % on October 1. Every indication right now is these tariffs will be imposed. Then the question becomes: are there grounds on which the tariffs would be removed? The only answer we have right now is if Mexico does “enough” to satisfy President Trump that all reasonable action was taken to stem the tide of migration, the tariffs would be removed. However, the determination as whether “enough” has been done is solely within the discretion of the President in the current proposal.

Having declared in February 2019 the migration situation at the U.S. southern border to be a matter of national security, President Trump has chosen now to invoke IEEPA to support the current action. IEEPA is the International Emergency Economic Powers Act, see 50 U.S.C. 1701 et seq. It authorizes the President to act in the national security interest of the country if dealing with “any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States.”

 Article 302 of NAFTA as currently enacted provides: “… no Party may increase any existing customs duty, or adopt any customs duty, on an originating good.” In other words, the imposition of this additional tariff on NAFTA-qualifying goods violates NAFTA and presents yet another reason why a precisely-worded policy is needed and a claim is possible. Can we also expect a World Trade Organization claim, assuming the bilateral discussions between the two countries do not diffuse the situation?

How does any of this help hardworking American business owners (of any size and in any industry) to keep their companies operating and profitable? This situation makes us all wonder how long it will take for the American public to wake up and realize China and Mexico are not paying these tariffs?

 

© 2019 Mitchell Silberberg & Knupp LLP
This post was written by Susan Kohn Ross of Mitchell Silberberg & Knupp LLP.
Read more on Trade on our Antitrust and Trade Regulation Page.

U.S. Increases Tariffs On Chinese Imports

The president announced this week that special Section 301 tariffs on $200 billion of Chinese imports (List 3) will increase from 10% to 25%. The Office of United States Trade Representative (USTR) issued the official notice of the tariff increase May 8. The rate increase is effective on May 10, 2019.

List 3 is composed of about 6,000 different Harmonized Tariff Schedule of the United States (HTSUS) codes and $200 billion worth of imports; comparatively, the previously imposed List 1 and List 2 collectively cover approximately 1,000 HTSUS codes and $50 billion worth of imports from China.

This rate increase will have a massive effect on almost all industries that rely on imports from China, including agriculture, automotive, electronics, textiles, and energy, just to name a few.

Two other things of particular note from the notice:

(1) increased tariffs will be applied to goods entered for consumption (or withdrawn from warehouse for consumption) on or after 12:01 a.m. Eastern time on May 10, 2019, and exported from China on or after May 10, 2019, so goods that were on the water prior to May 10 will not be affected.

(2) USTR indicates that it will promulgate a product exclusion process in the near future so importers, purchasers, trade associations and other interested parties can request that certain products be excluded from the tariff. Domestic producers will also have the opportunity to object to such exclusion applications.

 

© 2019 BARNES & THORNBURG LLP
You can learn more about trade and tariffs on the National Law Review Global Page.