Category: Antitrust & Trade Regulation

New Export Control Changes Affect Naval Warfare and Ground Vehicles

Morgan Lewis

 

Second phase of the Export Control Reform Initiative allows certain U.S. industries to fall into categories that may make them more attractive to foreign buyers.

On January 6, the Obama administration reached another important milestone of the president’s Export Control Reform (ECR) Initiative, with the second phase of revised export control lists and regulations taking effect.[1] These second phase changes significantly affect naval warfare, ground vehicle, and other industries as they present an opportunity for manufacturers and exporters to reclassify certain items under a more flexible and beneficial regulatory system.

The New Rules

The new lists and regulations continue the process of fundamentally updating the United States’ export control regimes and include revisions to U.S. Munitions List (USML) Categories VI (Vessels of War and Special Naval Equipment), VII (Tanks and Military Vehicles), XIII (Auxiliary Military Equipment), and XX (Submersible Vessels). The revisions transition many less sensitive items from the U.S. Department of State’s International Traffic in Arms Regulations (ITAR) USML to the more flexible Department of Commerce’s Export Administration Regulations (EAR) Commerce Control List (CCL).

The new USML controls in these four categories are no longer broad and generic controls that capture everything. They are now detailed, enumerated lists that impose controls based on the sensitivity of an item.

Category VI (Vessels of War and Special Naval Equipment)

“Surface vessels of war” remain in USML Category VI and are now positively defined in new ITAR section 121.15 as the following: battleships, aircraft carriers, destroyers, frigates, cruisers, corvettes, littoral combat ships, mine sweepers, mine hunters, mine countermeasure ships, dock landing ships, amphibious assault ships, or cutters. Less sensitive items—such as generic parts, components, accessories, or attachments—are now subject to the more flexible authorities of the EAR and will transition to the CCL under Export Control Classification Number (ECCN) 8A609.

The key to determining whether an item will transition from USML Category VI to the CCL under ECCN 8A609 or another ECCN in the CCL will depend on the application of the new ITAR and EAR definitions of “specially designed.” The revised USML Category VI does not contain controls on all general parts, components, accessories, and attachments specifically designed or modified for a defense article, regardless of their significance to maintaining a military advantage for the United States. Rather, it now contains a positive list of specific types of parts, components, accessories, and attachments that continue to warrant control on the USML. All other parts, components, accessories, and attachments are subject to the new “600 series” controls in Category 8 of the CCL.

Category VII (Tanks and Military Vehicles)

The revision narrows the types of ground vehicles controlled on the USML to only those that warrant control. Changes include the removal of most unarmored and unarmed military vehicles, trucks, trailers, and trains (unless specially designed as firing platforms for weapons above .50 caliber) and armored vehicles (either unarmed or with inoperable weapons) manufactured before 1956. Engines are now covered in revised USML Category XIX.

A significant aspect of the revised USML Category VII is that it does not contain controls on all generic parts, components, accessories, and attachments that are specifically designed or modified for a defense article, regardless of their significance to maintaining a military advantage for the United States. Rather, it contains a positive list of specific types of parts, components, accessories, and attachments that continue to warrant control on the USML. All other parts, components, accessories, and attachments are subject to the new 600 series controls in Category 0 of the CCL.

USML Categories XIII (Auxiliary Military Equipment) and XX (Submersible Vessel) also have been revised similarly. Category XIII continues to control certain cameras and encryption/information security items. Category XX will now control all submersible vessels in a single category, including submarines, as they have been moved from Category VI.

Definition of “Specially Designed”

The definition has a two-part approach. Part one “catches” things that are “specially designed,” and part two releases many types of items from the definition of “specially designed” so that they become not “specially designed.” Assuming an item is caught by part one, the exporter should focus on part two of the definition, i.e., the six separate “releases.”

Under part two, there are six possible ways an item can be released from being specially designed. For example, a part, component, accessory, attachment, or software is not considered to be specially designed if it is, regardless of form or fit, “a fastener (e.g., screws, bolts, nuts, nut plates, studs, inserts, clips, rivets, pins), washer, spacer, insulator, grommet, bushing, spring, wire, or solder.”

Also under part two, a part, component, accessory, attachment, or software is not deemed to be specially designed if it has the same function and performance capabilities and the same or equivalent form and fit as a commodity or software used in or with an item that (i) is or was in production (i.e., not in development) and (ii) is either not enumerated on the CCL or USML or is described in an ECCN controlled only for antiterrorism reasons.

Therefore, exporters and manufacturers should review the new definition of “specially designed” to ascertain if any items pending sale are released from the definition.

Implications

These changes will significantly affect exporters and manufacturers of naval warfare, ground vehicles, and other items as these items may no longer fall under ITAR jurisdiction, making the products more attractive to foreign buyers. Exporters and manufacturers will no longer need a manufacturing license agreement document for foreign manufacture of CCL items. Additionally, because there is no concept of “defense service” under the EAR, providing services related to CCL products will not require any technical assistance agreement documents. Items that become classified as EAR99 generally do not require a license to be exported or reexported to most destinations, and there is no annual registration fee paid to the Commerce Department, unlike under the ITAR. Furthermore, there is no “brokering” registration or licensing under the EAR.

In addition, many of the items moved to the CCL are now eligible for export without specific licenses under EAR license exceptions. One such EAR license exception is strategic trade authorization (STA), which is used when the item is intended for the ultimate end use by the governments of 36 U.S. allies and partners (although such exports carry with them additional compliance requirements). Failure to comply with STA requirements may result in an unlicensed export, opening up the exporter to significant penalties and fines.

On July 1, 2014, five more USML categories are scheduled to transition to the CCL in the third phase of ECR:

  • Category IV (Launch Vehicles, Guided Missiles, Ballistic Missiles, Rockets, Torpedoes, Bombs, and Mines)
  • Category V (Explosives and Energetic Materials, Propellants, Incendiary Agents, and Their Constituents)
  • Category IX (Military Training Equipment)
  • Category X (Personal Protective Equipment)
  • Category XVI (Nuclear Weapons Related Articles)

Marynell DeVaughn also contributed to this article.

[1]. For more information on the first phase that occurred in October 2013, view our November 14, 2013 LawFlash, “Export Control Changes Affecting Aircraft Industry Take Effect,” available here. 

Article by:

Of:

Morgan, Lewis & Bockius LLP

Registering Your Trademark with the Trademark Clearinghouse – Is Your House in Order?

Dickinson Wright Logo

 

“It’s happening – the biggest change to the Internet since its inception” is how the president of ICANN’s Generic Domains Division has described the new gTLD Program being implemented by The Internet Corporation for Assigned Names and Numbers (ICANN), and rightfully so. The new program will result in the expansion of available generic Top-Level Domains (gTLDs), such as .COM, .NET or .ORG, from the list of 22 that we’ve all become familiar with through the years, to a list of possibly 1,400 generic Top-Level Domains.

On October 23, 2013, the first new gTLDs were “delegated”. This means they were introduced into the Internet’s “Root Zone”, the central authoritative database for the Internet. As a result, the domain name Registries, the organizations approved to operate these and other soon-to-be-delegated gTLDs, can execute the final processes required to make their domain names available to Internet users. ICANN claims that the purpose of this unprecedented expansion of domain name extensions is to enhance competition, innovation and choice in the Domain Name space, providing a wider variety of organizations, communities and brands new ways to communicate with their audiences. As available real estate in the “.com” territory has become increasingly scarce, it is hoped that the new gTLDs will provide additional space for entities and individuals to set up an online presence. While it is true that virtually every two or three letter combination seems to have already been registered in the “.com” Top-Level Domain, this explosion of new generic top-level domains also means big bucks for domain name registrars and additional costs for trademark owners who properly protect their marks.

While 4 new gTLDs were delegated in October, the delegation has been a rolling process, with new generic Top-Level Domains being released in November, December and January. Below are just a few of some the gTLDs that have successfully completed the process. The list will continue to be expanded as the measured rollout of the new gTLDs progresses over the coming years:

.equipment

.kitchen

.diamonds

.bike

.shoes

.technology

.enterprises

.gallery

.education

.graphics

.ceo

.ventures

As the new gTLD program is rolled out, many trademark owners are wisely looking for ways to protect their brands from being registered by third parties as domain names in the new gTLD space without their knowledge or consent. In view of the rapidly changing gTLD landscape, owners need to be aware of how to protect their marks, sooner rather than later.

What Does All This Mean for Brand Owners?

Over the past year, there has been significant discussion and concern in the legal community regarding the potential for trademark infringement by third parties seeking to register domain names that incorporate the brands of others under these newly released gTLDs.

In light of the potential for infringement, ICANN has established certain mechanisms for the new gTLD program in order to try and protect the rights of brand owners. The main tool for doing so is the Trademark Clearinghouse (TMCH), an entity created by ICANN with which trademark owners can register their marks in advance of the new gTLD launches.

Brand owners who register their trademarks with the TMCH can take advantage of a priority, or “sunrise”, period during which they are entitled to register domain names that are identical to their marks, before registration opens to the general public. In addition, the TMCH provides the brand owner with automatic notification of any third-party attempts to register domain names that are identical to their marks, enabling the mark owner to then take appropriate legal action. To be clear, this mechanism does not stop third-parties from registering domain names identical to marks registered with the TMCH, but does notify the brand owner, or its representative, of such registration. These devices provide brand owners with help against cyber squatters seeking to register infringing domain names under the new gTLDs.

Registration of a trademark with the TMCH is available for registered trademarks, marks protected by statute or treaty, or court-validated marks. Registration is also available for any other marks protectable under the new gTLD registry’s policies and that meet the eligibility requirements of the TMCH. Registration with the TMCH is encouraged for brand owners in order to combat infringement of their brands in cyberspace and registration costs currently are $150 per mark for a one-year term of registration, $435 for a three-year term, and $725 for a five-year term. Such registration with the TMCH does not include fees that will be charged by the new gTLD registrars to register domain names during the “sunrise” or general public registration periods.

The biggest change to the Internet since its inception is happening now…make sure your marks are protected!

Article by:

Nicole M. Meyer

Of:

Dickinson Wright PLLC

The Top Ten Things You Should Know About The Innovation Act of 2013 (For Now)

Andrews Kurth

 

Companies that find themselves either defending against patent infringement lawsuits or enforcing their own patent infringement claims should pay close attention to the Innovation Act of 2013 (H.R. 2639). The Innovation Act (“the Act”), which was introduced by Representative Bob Goodlatte (R-VA), made it out of committee and has now been passed by the House, is aimed squarely at non-practicing entities (“NPEs”), i.e., companies that own patents but that do not sell any products or provide any services themselves. While NPEs may be the primary target, the Innovation Act, if passed, will impact all patent litigation, not just NPE efforts. Likewise, while primarily having a potentially negative impact on plaintiffs, the Act will also have potentially negative impacts on defendants. With bipartisan support and the backing of the White House, the Innovation Act may be the first such legislation to pass.

The Innovation Act makes numerous amendments to Title 35, the section of U.S. Code embodying U.S. patent law. These changes include introducing a discovery delay and other discovery changes, fee shifting, customer suit staying and party-of-interest transparency, heightening pleading requirements and expanding post-grant review. If nothing else, NPEs and their targets should know the following about these changes and the Innovation Act:

Discovery: Perhaps the most expensive and intrusive aspect of any U.S. patent litigation is the discovery process. Indeed, the expense and process of discovery is often the most effective tool used by plaintiffs to bring defendants to settlement, as the process can begin early in the case before any substantial determinations regarding the merits are decided. As a result, defendants are often forced to spend up to hundreds of thousands of dollars going through the discovery process before having any idea whether infringement is a substantial risk or not. The Innovation Act significantly neuters this tool and makes other significant changes to discovery in patent cases:

1. The Act limits discovery to only matters relevant to interpreting the claims until such time as the claims are actually interpreted. Claim interpretation is often dispositive of the merits of the case. Consequently, defendants would be able to dispose of frivolous cases before the expensive discovery process or make settlement decisions more fully informed of the risks; and

2. The Act seeks to better balance discovery costs between the parties, ordering the Judiciary Conference to address the presumably unfair burden placed on defendants and place a higher burden of costs on plaintiffs.

Fee Shifting: Another area in which U.S. patent litigation, indeed U.S. litigation as a whole, differs from foreign litigation is that, except in extreme cases, each party bears its own litigation costs. Currently, NPEs often file suit against multiple defendants. Each defendant is often offered a settlement for an amount much less than that defendant’s anticipated litigation costs. As defendants settle, the settlement price typically is increased for other defendants, further encouraging early settlement. Consequently, many defendants that otherwise believe they have a strong non-infringement case will settle because the cost of achieving victory is substantially higher than settling. This strategy would not work in most foreign countries since, in those countries, the losing party pays the winning party’s fees and costs. The Innovation Act would align U.S. patent litigation with this practice and eliminate the strategy of leveraging high litigation costs for early settlement.

3. In other words, under the Act the Court can force the losing party to pay the winning party’s attorney fees and costs. If passed, this would have a dramatic effect on patent litigation defendants’ decision making process and the typical enforcement strategy of many NPEs. By allowing Courts to shift the litigation costs to the losing side, defendants may be significantly motivated to litigate when they have a strong case even if the price of settlement is relatively low. Combined with the discovery delay described above, defendants will have considerable incentive to remain in the case at least through claim interpretation and to fight infringement claims if the claim interpretation is favorable…

4. …but, by allowing Courts to shift litigation costs to the losing side, defendants’ potential exposure may also be much higher. If the defendant ultimately loses a case, the Court presumably could order them to pay the plaintiff’s litigation costs, particularly if it was apparent that they should have settled. Consequently, the Act’s changes will necessitate defendants making smart decisions about their risk exposure. Fortunately, the discovery delay will enable defendants to economically make more effective decisions by delaying significant discovery costs until after claim interpretation.

5. The Act’s fee-shifting provisions also allows for the limited joinder of parties (such as those covered by transparency provisions described below) to satisfy the award of litigation costs. In principle, this provision could be used against defendants as well as plaintiffs.

The other changes mentioned above may also cast a chill on the NPE business and other patent plaintiffs.

Customer Suit Staying

6. The Innovation Act requires the staying of patent lawsuits against a defendant’s customer. Plaintiffs often sue a defendant’s customers in order to pressure the defendant into settling, often on terms less favorable than the defendant’s actual liability would dictate. Under the Act, an action against a customer may be stayed if the customer agrees to be bound by the results of a suit against the manufacturer. Consequently, customer suit staying takes away another pressure point for plaintiffs.

Post-Grant Review Expansion

7. The Innovation Act expands the post-grant review available against covered business methods (“CBMs”), making CBM review a more effective tool to fight back against patent lawsuits. Specifically, the Act makes the CBM review program permanent and codifies the broad interpretation of what is a CBM.

Heightened Pleading Requirements

8. Currently, many plaintiffs merely name the patents infringed and, in some cases, the products or services infringing. Heightened pleading requirements require more detailed initial pleading by plaintiffs, including greater details describing how a defendant’s products or services infringe the asserted patent claims.

Party-of-Interest Transparency

9. The actual parties of interest are often not discernible from patent complaints. Many NPEs are shell companies that serve the purpose of hiding the actual party asserting the patent. The Innovation Act requires detailed descriptions of the plaintiff’s business and identification of the real party or parties-of-interest behind the asserting plaintiff. Such transparency makes next to impossible for plaintiff’s to hide their true identity and may impact litigation strategies currently used by NPEs and other plaintiffs.

10. Additionally, the party-of-interest transparency provisions of the Act also permit possible joinder of the real party or parties-of-interest behind the asserting plaintiff. This provision gives real teeth to the Fee Shifting provisions of the Act as it may prevent a real party-of-interest from hiding behind a shell company with limited or no resources and avoiding the consequences of the Fee Shifting provisions.

Keep in mind that the Innovation Act will not just affect the Act’s main target, NPEs. Indeed, the Innovation Act has the potential to affect others. Defendants that choose to fight a patent lawsuit rather than settle could find themselves on the losing end of the fee-shifting provisions. Also, the Act may encourage a delay in sharing sales numbers until after claim interpretation, with the result that defendants that may have previously settled for reasonable amounts may find themselves paying much higher amounts if the claim interpretation goes poorly. On a different front, the amounts NPEs and others are willing to pay for patents may be reduced because of the greater risks and costs involved in enforcement. This could reduce the market for patents that provide additional sources of revenue for many patent owners. This in turn could reduce the overall value of patents, the amount companies are willing to spend on patenting and result in an overall chilling effect on research and development and ultimately innovation. As the Innovation Act evolves through the legislative process, some or all of the points above may vary, but the clear direction of the Act, the limitation of patent litigation by NPEs, will remain.

Article by:

Sean S. Wooden

Of:

Andrews Kurth LLP

Senior U.S. Officials Discuss Foreign Corrupt Practices Act (FCPA) Enforcement Trends and Activity

Morgan Lewis

On November 18–21, U.S. regulators attended the 30th International Conference on the Foreign Corrupt Practices Act (FCPA), where they discussed the near-record amount of FCPA penalties in 2013 and disclosed that there are more than 150 ongoing FCPA investigations. Regulators from the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) also explained new developments in cross-border cooperation as well as their efforts to prosecute individual FCPA defendants.

Combined FCPA Penalties

According to Charles E. Duross, Head of the DOJ’s FCPA Unit and Deputy Chief of the Fraud Section, the FCPA Unit is “busier today than [it] ever has been” investigating and prosecuting FCPA misconduct. Although the DOJ may not have initiated as many enforcement actions to date in 2013 as in years past, Duross characterized 2013 as “the fifth biggest year in [the FCPA’s] history in terms of overall penalties” and predicted “that the ranking will move up before the end of the year.” As explained by Duross, “We have a pretty substantial pipeline of matters, and I actually have every reason to expect that, in the coming weeks and months, you will see even more activity, [including] more standard cases as well as . . . ‘grand corruption’ cases.”

Ongoing Investigations

Duross estimated that the DOJ is currently investigating “more than 150 cases” of potential FCPA violations and expects the DOJ to bring “very significant cases, top 10 quality type cases” in 2014. Duross stated that, while the number of investigations fluctuated due to the issuance of declinations, the DOJ has received a “constant inflow” of violations information, ranging from voluntary disclosures to whistleblower complaints. On November 15, the SEC’s Office of the Whistleblower reported that it logged 3,238 whistleblower tips and complaints in 2013, resulting in a combined total of 6,573 tips and complaints since the initiation of the whistleblower program in August 2011.[1] Approximately 150 of those 3,238 tips and complaints have involved FCPA issues, including “some very, very good whistleblower complaints,” according to according to Kara N. Brockmeyer, Chief of the SEC’s FCPA Unit. While the SEC has yet to announce any whistleblower awards for FCPA cases, the agency announced its largest award to date—more than $14 million—to an anonymous whistleblower last month.[2]

Enhanced International Cooperation and Cross-Border Enforcement

Nearly all of the U.S. regulators speaking at the conference trumpeted the increase in global cooperation and cross-border enforcement. In his November 19 speech, Andrew J. Ceresney, co-director of the SEC’s Division of Enforcement, stated that the SEC and DOJ have “capable and committed law enforcement partners worldwide, and their numbers are steadily growing.”[3] The rise in cross-border cooperation and enforcement appears to be attributable, in part, to the enactment of new anticorruption legislation in countries ranging from Brazil to Latvia. As explained by Ceresney:

Over the past five years, we have experienced a transformation in our ability to get meaningful and timely assistance from our international partners. And through our collaborative efforts, the world is becoming a smaller place for corrupt actors. In particular, many of our foreign counterparts have taken important steps this year to strengthen their own anticorruption laws and step up their enforcement efforts. For example, Brazil passed the Clean Company Law, an anticorruption law that, for the first time, imposes criminal liability on companies that pay bribes to foreign government officials. More expansive in its reach than the FCPA, this new law forbids all companies that operate in Brazil from paying bribes to any government official, whether domestic or foreign. In the U.K., the Serious Fraud Office announced its first prosecution case under the Bribery Act. In Canada, the government enacted amendments strengthening the Corruption of Foreign Public Officials Act and prevailed in its first litigated case against an individual for violating this law. And recently, Latvia became the newest country to join the [Organisation for Economic Co-operation and Development] Working Group on Bribery.

As other countries begin to step up their efforts to combat corruption, it makes our job easier. Countries with strong anti-corruption laws are often great partners to us in combating corruption. Scrutiny from the local government, in addition to us, will often be a strong deterrent to bribery. More and more, our investigations are conducted in parallel with a foreign government.

In remarks made on November 19 at the FCPA conference, Brockmeyer advised attendees that the SEC would start working with more of its foreign counterparts—including those that it has not “necessarily worked with before”—in the future. Ceresney made a similar observation, noting “I am encouraged by the close collaboration [with foreign agencies] and fully expect the pace and extent of our cooperation with foreign agencies to grow in the coming years. Indeed, only recently I have been involved in a case in which we are receiving cooperation from a country that has never before provided any meaningful assistance.”

Continued Focus on Individual Prosecutions

Individuals from both the DOJ and SEC also emphasized their enduring interest in bringing individual FCPA violators to justice. As explained by Ceresney, “A core principle of any strong enforcement program is to pursue culpable individuals wherever possible. . . . Cases against individuals have great deterrent value as they drive home to individuals the real consequences to them personally that their acts can have. In every case against a company, we ask ourselves whether an action against an individual is appropriate.”

Ceresney acknowledged that FCPA enforcement actions against individuals pose unique challenges. For instance, regulators may be unable to reach individuals in foreign jurisdictions, and remedies are often limited or unenforceable. Regulators must also confront difficulties in obtaining foreign documents, collecting evidence, and gaining access to overseas witnesses. According to Ceresney, the SEC is overcoming these challenges by “expanding the availability and use of Memoranda of Understanding with international financial regulators to obtain bank records, other documents, and testimony; using border watches and other methods of obtaining information from foreign nationals; subpoenaing U.S.-based affiliates of foreign companies; and more aggressively seeking videotaped depositions that [the SEC] can use at trial if [it] cannot secure live testimony.”

The SEC currently has pending FCPA actions against executives of three companies, Magyar Telekom, Siemens, and Noble. In April 2013, the SEC obtained its sec
ond-highest penalty ever assessed against an individual in an FCPA case when one of the Siemens executives agreed to pay a $275,000 fine.[4] According to Ceresney, “these cases have sent an unambiguous message that [the SEC] will vigorously pursue cases to hold individuals accountable for FCPA violations—including executives at the highest rungs of the corporate ladder.”

The DOJ similarly has pending FCPA actions against individuals and, according to Duross, is firmly committed to holding individuals accountable for FCPA misconduct. In support of this commitment, Duross cited recent actions against executives from BizJet, Maxwell Technology, and Direct Access Partners. It is worth noting, however, that the DOJ also brought actions against individuals associated with BSG Resources Ltd. and Willbros in 2013. Duross warned that resolutions for corporations—which occasionally precede actions initiated against individuals—do not immunize individual bad actors from subsequent criminal prosecution.

Increased Personnel Resources

According to Duross, the DOJ’s FCPA Unit “has more resources today than at any time before” and is working with “every major U.S. Attorneys’ Office in the United States” on FCPA matters. Duross explained that U.S. Attorneys’ Offices “serve as a force multiplier” for the FCPA Unit and provide a “deep bench of talent” and knowledge about the local jurisdictions. The addition of human resources—including trial attorneys, paralegal assistance, and translators—has improved the DOJ’s ability to investigate and prosecute FCPA misconduct.

[1]. U.S. Sec. & Exch. Comm’n, 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program at 1, 20 (Nov. 15, 2013), availablehere.

[2]. Press Release, U.S. Sec. & Exch. Comm’n, SEC Awards More Than $14 Million to Whistleblower (Oct. 1, 2013), available here.

[3]. Andrew Ceresney, Co-Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Keynote Address at the International Conference on the Foreign Corrupt Practices Act (Nov. 19, 2013), available here.

[4]. U.S. Sec. & Exch. Comm’n, Litigation Release No. 22676, Former Siemens Executive Uriel Sharef Settles Bribery Charges (Apr. 16, 2013),available here.

 

Article by:

Of:

Morgan, Lewis & Bockius LLP

A Giant Leap: EU-China Bilateral Investment Treaty Negotiations to Be Launched Formally

McDermottLogo_2c_rgb

 

Negotiations for a bilateral investment treaty between the European Union and China are expected to be formally launched during the EU-China Summit next week. Though the launch would be just the first step in a long negotiation process, it would also be a giant leap for upgrading the investment relationship between the EU and China.

On 24 October 2013, the fourth meeting of the EU-China High Level Economic and Trade Dialogue was held in Brussels.  Among other points, the most recent talk between the world’s two biggest traders reaffirmed the willingness to formally launch negotiations for a bilateral investment treaty (BIT) during the EU-China Summit to be held in Beijing later this month.

This move is significant for several reasons.

  • There is huge potential for investment flow between the European Union and China.

According to provisional Eurostat data, in 2012 Chinese investments into the EU(27) amounted to €3.5 billion, and only accounted for 2.2 per cent of total foreign direct investment (FDI) flowing into the EU. By contrast, in the same year EU firms invested €9.9 billion in China, accounting for approximately 11.4 per cent of all China’s inward FDI. It is worth noting that the EU’s outward FDI to China only accounted for 2.4 per cent of total outbound investment flowing from the EU to the rest of world in 2012. By contrast, bilateral trade in goods and services is more than €1 billion per day.

  • The existing BITs between China and EU Member States are to be upgraded.

China signed its first BIT with Sweden in 1982, and currently has similar arrangements with each and every EU Member State (except Ireland).  However, these BITs were negotiated and executed in the past 30 years, during which China went through substantial changes in all aspects of society, including a significant increase in outbound investment.  Some of the BITs were updated to reflect such changes, e.g., the China-Netherlands BIT was amended to include national treatment in 2001.

Overall, the EU-China BIT will not be a simple compilation of the existing BITs between China and EU Member States, but an upgrade of the investment relationship between them.

  • The negotiation of a EU-China BIT is likely to be a long process.

The negotiation of a BIT between two giant economic entities is likely to be a long process.  For example, the China-US BIT negotiation is still in its preliminary stage more than 30 years after both parties opened the dialogue in 1980.  The China-Canada agreement took 18 years and went through 22 rounds of formal negotiations.

The difficulties of these negotiations must not be underestimated.  The EU-China BIT will go further than the existing bilateral agreements with individual Member States.  The EU negotiators are keen to include provisions on market access, including access to services, and on intellectual property.  The negotiation process is likely to be complicated by calls from the European Parliament to include provisions on fundamental rights and values (social, environmental, consumer, etc.).

From a procedural point of view, this will be the first trade agreement negotiated by the EU since the assignment of trade and investment agreements to the exclusive competence of the EU under the Lisbon Treaty.  This gives the European Parliament a key role to play in approving any final agreement.

In sum, if both parties formally launch the negotiations in November, it will be a small step in the negotiation process, but a giant leap for upgrading the investment relationship between EU and China.

If EU industry has concerns about obstacles to FDI in China, including discrimination and absence of mutual treatment, it is not too late to raise them with the Directorate General for Trade of the European Commission.

Article by:

Philip Bentley, QC

Frank Schoneveld

Bryan Fu

Of:

McDermott Will & Emery

Letters of Credit Overview and Fundamentals

vonBriesen

 

Letters of Credit (“L/Cs”) have evolved over nearly three centuries of commerce into an essential tool for banks and their customers in international business transactions, financings and government contracting. This Update provides an overview of some of the key legal and practical concepts that are necessary to use this tool effectively.

The FDIC’s examiner’s handbook defines a letter of credit as “a document issued by a bank on behalf of its customer authorizing a third party to draw drafts on the bank up to a stipulated amount and with specified terms and conditions,” and states that an L/C is a bank’s “conditional commitment…to provide payment on drafts drawn in accordance with the document terms.”

Governing Law

The sources of “law” governing L/Cs are:

  • Statute: UCC Article 5 applies to “letters of credit and to certain rights and obligations arising out of transactions involving letters of credit.” UCC Section 5-108(e) provides that an issuing bank “shall observe standard practice of financial institutions that regularly issue letters of credit.”
  • Practice codes: Derived from two sources: the UCP600 (Uniform Customs and Practice for Documentary Credits 2007 Revision, International Chamber of Commerce Publication No. 600) and the ISP98 (Institute for International Banking Law and Practice Publication 590; International Standby Practices (1998)).
  • Contract law: With some limited exceptions, any provision of Article 5 may be modified by contract. Thus, if the UCP600 or ISP98 is incorporated into an L/C, it supersedes any contrary provision of Article 5. The exceptions include the “Independence Principle” (discussed below) and certain other rights and obligations of the issuing bank.

Terminology

Certain terms are important to an understanding of the parties’ respective rights and obligations, with some of the most basic being:

  • Issuer – the bank that issues the L/C and is required to Honor a Draw by the Beneficiary;
  • Applicant – the customer for whose account the L/C is issued;
  • Beneficiary – the person in whose favor the L/C is issued and who is entitled to Present/Draw and receive payment from the Issuer;
  • Honor – performance of the Issuer’s undertaking (in the L/C) to make payment; and
  • Presentation (also called a Draw) – delivery of document(s) to an Issuer for (or to induce) Honor of the L/C.

The Independence Principle

Central to an understanding of L/C law and practice is that an L/C is a self-contained whole. This is known as the “Independence Principle” based upon language in UCC §5-103, which states that the rights and obligations of an Issuer to a Beneficiary under an L/C are “independent of the existence, performance, or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary.”

The Independence Principle protects all parties. The Issuer is protected because, as long as the Presentation requirements in the L/C are strictly complied with, the Issuer must Honor it without looking into the relationship between the Applicant-customer and the Beneficiary making the Draw. The Applicant and Beneficiary are also both protected because the Issuer’s obligations under the L/C are not affected by the relationship between the Applicant-customer and the Issuer itself. Thus, the Applicant may be in default of its obligations to the Issuer, but the Issuer must nevertheless Honor a proper Presentation.

Types of L/Cs

L/Cs fall into two general categories: “commercial/documentary L/Cs” (which are the primary focus of the UCP600) and “everything else,” consisting mainly of what are known as “Standby L/Cs” which, themselves, come in several varieties and are covered by the ISP98.

“Commercial/Documentary L/Cs” are typically issued to facilitate specific transactions and to assure payment in trade or commerce (usually international). Generally, Presentation is made when the underlying transaction is consummated. These are referred to as “documentary L/Cs” because a Draw requires documentary proof that the underlying transaction has occurred.

For example, an exporter and importer might agree that goods will be paid for at the time of shipment. The exporter won’t ship without assurance of getting paid, and the importer won’t pay without assurance that the goods have been shipped. Thus, the importer (Applicant) arranges with its Bank (Issuer) for an L/C that gives the exporter (Beneficiary) the right to Draw when the exporter provides the Issuer with an original Bill of Lading proving shipment. Anecdotally, this is partly why documentary L/Cs were conceived – to avoid having the Issuer bank independently verify shipment, which might have involved the banker making a trip to the dock and watching the goods being loaded and the ship sailing off beyond the horizon.

“Consummation” of the underlying transaction – i.e., the goods being placed on the ship – is defined by the terms of the L/C, as are the documentation requirements, which are either spelled out in the L/C or incorporated from the UCP600.

“Standby L/Cs“. The ISP98 defines eight types of Standby L/Cs, of which the most common are “Financial Standbys.”

A Financial Standby is an irrevocable guarantee by an Issuer of Applicant’s payment or performance in an underlying transaction. The Beneficiary may Draw, and the Issuer must Honor, if its customer (Applicant) does not pay, deliver or perform. Some event, usually a default by Applicant under its contract with Beneficiary, “triggers” the Beneficiary’s right to Draw. Although independent proof of the Beneficiary’s right to Draw is not required, a Financial Standby is still “documentary” in the sense that the Beneficiary must make the Draw in writing and (typically) represent to the Issuer that Applicant has defaulted. Due to the Independence Principle, the Issuer (without verifying the default) must Honor if the Draw complies with the Presentation requirements spelled out or incorporated into the L/C.

Financial Standbys present an Issuer with both a credit benefit and a credit risk. Because Applicant’s default under its contract with the Beneficiary is a condition to the Issuer having to Honor the Beneficiary’s Draw, the Issuer may never have to “fund” (Honor) as long as Applicant doesn’t default; BUT, if the Issuer does have to fund, it will be on account of a customer who has already defaulted on a (probably material) business obligation.

A “Direct Pay L/C” is a type of Financial Standby. While it is also an Issuer’s guarantee of Applicant’s payment of a debt or other obligation, the difference is that Applicant’s default is not a condition to Draw – all payments are made by Draws on the L/C. Direct Pay L/Cs are useful in cases where the “Beneficiary” is a group of unaffiliated debt holders (i.e., holders of publicly-traded bonds) because this payment method provides liquidity and avoids bankruptcy preference claims against debt service payments. Because of the Independence Principle, the Issuer is the primary obligor for payment of debt service; thus, Applicant’s default is of no concern to bondholders and bonds backed by an irrevocable Direct Pay L/C are marketed on the strength of the Issuer’s credit, not the Applicant’s.

Of special note are Standby L/Cs required by governmental entities. Various Wisconsin Statutes and Administrative Rules require or permit a person transacting business with a state agency (obtaining a license or permit, for example) to provide a Standby L/C primarily to demonstrate proof of financial responsibility in cases where the license or permit, for example, creates a potential monetary obligation to the State. Many Wisconsin state agencies’ regulations make reference to such L/Cs, but only the Department of Natural Resources and the Department of Transportation have prescribed forms.

Issuer’s Risks

An Issuer’s most obvious risk is its customer’s default: failure to reimburse the Issuer after a Draw has been Honored. The reimbursement obligation can be a requirement to deposit funds with the Issuer immediately upon a Draw, but can also be part of an ongoing credit relationship where Draws are simply treated as “advances” on a term or revolving credit agreement.

Issuer banks also face other risks, such as fraud (a legitimate Beneficiary makes a fraudulent Draw), forgery (impostor Beneficiary makes a Draw) and sovereign, regulatory and legal risks. Regulatory issues created by L/Cs involving lending limits, contingent liabilities, off-balance sheet treatment and regulatory capital requirements also come into play but are beyond the scope of this overview.

Common Problems

Among the more common L/C problems we have seen with our Issuer bank clients are:

  • Standby L/Cs that incorrectly incorporate provisions of the UCP600 or, less frequently, Commercial/Documentary L/Cs that incorrectly incorporate from the ISP98;
  • not being aware of automatic renewal and reinstatement provisions, and potential post-expiry obligations;
  • failing to insist on strict adherence to the Presentation requirements, especially if they are incorporated from the UCP600 or the ISP98;
  • failing to Honor a proper Draw as an “accommodation” to its customer/Applicant who has informed the bank of a dispute with the Beneficiary; and
  • poorly-drafted L/Cs that make inappropriate reference to non-documentary issues.

Banks issuing L/Cs to assist customers in export-import transactions, or providing proof of financial responsibility or liquidity/credit support, should be aware that their obligations and rights are often not obvious from simply reading the L/C without being familiar with the underlying laws and practice codes that are summarized in this Update. As noted above, a carefully-considered and well-drafted L/C protects all parties, including the Issuer.

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von Briesen & Roper, S.C.

New Federal Communication Commission (FCC) Rules to Protect Telephone Consumers from Autodial/Robocalls

Lewis & Roca

On October 16, 2013, new Federal Communication Commission rules took effect to further protect consumers under the Telephone Consumer Protection Act of 1991 (TCPA). See 47 U.S.C. § 227; 47 C.F.R. § 64.1200. The changes ordered by the FCC are designed to protect consumers from unwanted autodialed or pre-recorded telemarketing calls, also known as “telemarketing robocalls.” The new TCPA rules accomplish four main things: (1) require prior written consent for all autodialed or pre-recorded telemarketing calls to wireless numbers and residential lines; (2) require mechanisms to be in place that allow consumers to opt out of future robocalls even if during the middle of a current robocall; (3) limit permissible abandoned calls on a per-calling campaign basis in order to discourage intrusive calling campaigns; and (4) exempt from TCPA requirements calls made to residential lines by health care related entities governed by the Health Insurance Portability and Accountability Act of 1996. None of the FCC’s actions change the requirements for prerecorded messages that are non-telemarketing, informational calls such as calls by or on behalf of tax-exempt organizations, calls for political purposes, and calls for other non-commercial purposes including those to people in emergency situations.

Under the FCC’s new rules, “prior written consent” will require two things: a clear and conspicuous disclosure that by providing consent the consumer will receive auto-dialed or prerecorded calls on behalf of a specific seller, and a clear an unambiguous acknowledgement that the consumer agrees to receive such calls at the mobile number. The content and form of consent may include an electronic or digital form of signature such as the FTC has recognized under the E-SIGN Act. See Electronic Signatures in Global and National Commerce Act, 15 U.S.C. § 7001 et seq. However, prior written consent may be terminated at any time. In addition, the written agreement must be obtained “without requiring, directly or indirectly, that the agreement be executed as a condition of purchasing any good or service.” 16 C.F.R. § 310.4(b)(v)(A)(ii).

Read the full rule here.

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California Enacts New Data Privacy Laws

Sheppard Mullin 2012

As part of a flurry of new privacy legislation, California Governor Jerry Brown signed two new data privacy bills into law on September 27, 2013: S.B. 46 amending California’s data security breach notification law and A.B. 370 regarding disclosure of “do not track” and other tracking practices in online privacy policies. Both laws will come into effect on January 1, 2014.

New Triggers for Data Security Breach Notification

California law already imposes a requirement to provide notice to affected customers of unauthorized access to, or disclosure of, personal information in certain circumstances. S.B. 46 adds to the current data security breach notification requirements a new category of data triggering these notification requirements: A user name or email address, in combination with a password or security question and answer that would permit access to an online account.

Where the information subject to a breach only falls under this new category of information, companies may provide a security breach notification in electronic or other form that directs affected customers to promptly change their passwords and security questions or answers, as applicable, or to take other steps appropriate to protect the affected online account and all other online accounts for which the customer uses the same user name or email address and password or security question or answer. In the case of login credentials for an email account provided by the company, the company must not send the security breach notification to the implicated email address, but needs to provide notice by one of the other methods currently provided for by California law, or by clear and conspicuous notice delivered to the affected user online when the user is connected to the online account from an IP address or online location from which the company knows the user ordinarily accesses the account.

Previously, breach notification in California was triggered only by the unauthorized acquisition of an individual’s first name or initial and last name in combination with one or more of the following data elements, when either the name or the data elements are unencrypted: social security number; driver’s license or state identification number; account, credit card or debit card number in combination with any required security or access codes; medical information; or health information. S.B. 46 not only expands the categories of information the disclosure of which may trigger the requirement for notification, it also—perhaps unintentionally—requires notification of unauthorized access to user credential information even if that information is encrypted. Thus, S.B. 46 significantly expands the circumstances in which notification may be required.

New Requirements for Disclosure of Tracking Practices

A.B. 370 amends the California Online Privacy Protection Act (CalOPPA) to require companies that collect personally identifiable information online to include information about how they respond to “do not track” signals, as well as other information about their collection and use of personally identifiable information. The newly required information includes:

  • How the company responds to “do not track” signals or other mechanisms that provide consumers the ability to exercise choice over the collection of personally identifiable information about their online activities over time and across third-party websites or online services, if the company collects such information; and
  • Whether third parties may collect personally identifiable information about a consumer’s online activities over time and across different websites when a consumer uses the company’s website.

These disclosures have to be included in a company’s privacy policy. In order to comply with the first requirement, companies may provide a clear and conspicuous hyperlink in their privacy policy to an online description of any program or protocol the company follows that offers the user that choice, including its effects.

It’s important to note that the application of CalOPPA is broad. It applies to any “operator of a commercial Web site or online service that collects personally identifiable information through the Internet about individual consumers residing in California who use or visit its commercial Web site or online service.” As it is difficult to do business online without attracting users in technologically sophisticated and demographically diverse California, these provisions will apply to most successful online businesses.

What to Do

In response to the passage of these new laws, companies should take the opportunity to examine their data privacy and security policies and practices to determine whether any updates are needed. Companies should review and, if necessary, revise their data security breach plans to account for the newly added triggering information as well as the new notification that may be used if that information is accessed. Companies who collect personally identifiable information online or through mobile applications should review their online tracking activities and their privacy policies to determine whether and what revisions are necessary. The California Attorney General interprets CalOPPA to apply to mobile applications that collect personally identifiable information, so companies that provide such mobile apps should remember to include those apps in their review and any update.

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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.