Category: Global

FCPA Landmines Beneath the Surface of the COVID-19 Crisis

COVID-19 took the world by surprise and continues to spread across the globe in more than 210 countries and counting.  The outbreak in the United States escalated rapidly, with over 585,000 confirmed cases as of April 14, 2020.  The federal government and a number of hard-hit states were caught off guard, and soon learned that their inventories of personal protective equipment (“PPE”) and other life-saving equipment such as test kits and ventilators were insufficient to keep pace with the pandemic.  The demand for equipment to fight COVID-19 skyrocketed and government and commercial entities have shifted into high gear to respond.  Whether motivated by humanitarian concern or commercial enterprise, many state and local governments, companies and individuals are now looking abroad to procure critical supplies on an expedited basis.  At the same time, many foreign industrial manufacturers are positioning themselves for the high demand of exports by adapting their facilities to produce PPE.  For example, Chinese electric car maker BYD announced on March 13, 2020 it is now the largest face mask factory in the world—less than one month after converting its facilities in response to the pandemic.  In the midst of these exigent circumstances, the global supply chain landscape is replete with Foreign Corrupt Practices Act landmines—and well-intentioned companies hoping to partner with foreign PPE manufacturers could become a casualty if they don’t watch their step.

Anticipated FCPA Enforcement in the Wake of the COVID-19 Pandemic

The Foreign Corrupt Practices Act of 1977 (“FCPA”) makes it unlawful for any commercial enterprise, or individual representing one, to offer, promise to pay, or direct or authorize another individual to pay money or anything of value to a foreign government official for the purpose of expanding or maintaining their commercial interests.  15 U.S.C. §§ 78dd-1, et seq.  The FCPA also requires publicly traded companies “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”  Id.  The statute has a criminal and civil bite; the DOJ is responsible for all criminal enforcement of the FCPA and civil enforcement of its bribery provisions, and the SEC is responsible for civil enforcement of the FCPA’s “books and records” provisions if securities are involved.  The DOJ and SEC rarely enforced the FCPA in its first three decades of existence.  These agencies, however, have aggressively interpreted and enforced the law since the turn of the century.  From 2000 to 2019, the DOJ brought 235 enforcement actions and the SEC brought 168 enforcement actions, together involving over $11 billion in monetary resolutions.  In 2019, the U.S. Government collected more in a single year through DOJ and SEC actions against companies in FCPA cases than ever before.  There are several FCPA-related considerations for companies to keep in mind as they navigate business during the COVID-19 pandemic.

Indeed, U.S. companies would be wise to assume the government will persist in its aggressive “a bribe is a bribe” approach to the FCPA, even in the midst of a worldwide health crisis.  First, corruption tends to thrive in times of crisis.  Weaknesses in governmental systems become exposed, and those with nefarious intent, or just too much aggressiveness, seize on the opportunity to exploit the panic, fear and suffering that accompanies disasters.  Increased corruption, in turn, often results in increased enforcement.  The financial crisis of 2008, for example, increased FCPA enforcement.  As companies faced pressure to obtain business and even maintain operational status during the crisis, their focus on FCPA compliance decreased.  The global economy came to a halt, and many companies decided to quickly merge and consolidate.  The speed of these consolidations resulted in the discovery by some acquiring companies of questionable payments and accounting practices both pre- and post-merger, resulting in increased FCPA compliance risks.  The DOJ and SEC were alerted and brought more FCPA enforcement actions and imposed higher civil fines from 2008 to 2011 than ever before.

Second, although the current administration has not directly addressed whether and to what extent it will pursue FCPA enforcement actions as a result of the COVID-19 pandemic, the DOJ and SEC have announced their intent to prioritize coronavirus-related fraud schemes.  For example, on March 20, 2020, the DOJ issued a press release announcing that Attorney General William P. Barr “is urging the public to report suspected fraud schemes related to COVID-19” and directing all U.S. Attorneys to prioritize investigating and prosecuting such schemes.  Four days later, the DOJ established the COVID-19 Hoarding and Price Gouging Task Force “to address COVID-19-related market manipulation, hoarding, and price gouging.”  Given the global supply chain pressure points and implications of the COVID-19 crisis, it would not be a stretch for the administration to extend its prioritization of such COVID-19-related fraud cases to include COVID-19-related global anti-corruption and bribery cases.

Third, the federal government is in the process of rolling out over two trillion dollars in aid and recovery funding in response to the coronavirus pandemic, and it likely will be eager to replenish its resources after such an unprecedented relief package.  The FCPA historically has generated significant revenue for the U.S. Government, and all criminal fines, civil penalties and disgorged profits resulting from FCPA violations go directly into the U.S. Treasury.  When the COVID-19 crisis curve drops in the U.S., the DOJ, SEC, and federal prosecutors could turn to the FCPA to assist the U.S. Government in bouncing back from the financial impact of the pandemic.

Finally, the current administration and others have been critical of China’s response to the COVID-19 crisis; Secretary of State Mike Pompeo, for example, remarked in a March 5, 2020 press conference that “there was information [from China] that could have been made available more quickly and data that could have been provided and shared among health professionals across the world.”  Further, on March 12, 2020, Chinese Foreign Ministry spokesman Zhao Lijian suggested, via Twitter, that the U.S. has not been transparent and that the U.S. Army may have brought the epidemic to Wuhan, China.  In the wake of a potential diplomatic fallout between the U.S. and China, the administration may be particularly vigilant of and aggressive toward U.S.-China deals implicating the FCPA.

Potential FCPA Landmines

American companies that import goods or supplies from abroad frequently rely on customs agents and third-party brokers to assist them in maneuvering the often complex customs process.  The use of such agents, however, may expose companies to FCPA compliance risks.  Numerous FCPA enforcement actions brought by the DOJ and the SEC have focused on improper payments made by third-party agents to government officials to secure customs clearance or additional business.

For example, on September 26, 2019, the SEC announced that a Wisconsin-based digital and print marketing provider agreed to pay nearly $10 million to settle charges that it violated the FCPA by engaging in multiple bribery schemes in Peru and China.  The SEC Order found that from 2010 to 2015 the company’s China-based subsidiary used sham sales agents to make and promise improper payments to employees of private and governmental customers to secure business.  Similarly, on February 28, 2020, an American communication technology provider settled FCPA charges with the SEC and DOJ for $8.8 million for using resellers and distributors in China to bribe government officials.

As companies face intense pressure to quickly obtain goods and clear them through the customs process to mitigate the healthcare and economic consequences posed by COVID-19, the risk of FCPA violations runs high.  For example, a customs official could refuse to allow the export of PPE without a bribe, and a company employee may be desperate enough to decide that the payment is worth making to preserve his or her employment at a time when company revenues are declining, non-performing employees are subject to lay-offs and furloughs, and sales expectations and revenues remain high.  Further, a company venturing into uncharted terrain by seeking to purchase high-demand and scarce products abroad to compensate for losses in traditional lines of business might face increased risks of bribery and corruption primarily due to inexperience.  Indeed, the pressure to maintain business or get back to “business as usual” may lead some employees to get dangerously close to or even cross ethical boundaries by committing bribery or other similar misconduct.

Best Practices

Companies seeking to procure goods and supplies abroad during the COVID-19 pandemic should consider the following best practices to avoid falling out of compliance with the FCPA:

  1. Maintain a Strong Compliance Presence

Company management should reinforce and reiterate the company’s commitment to its anti-corruption and anti-fraud compliance programs. Many companies are taking proactive steps to ensure the safety and well-being of their employees, cope with new “Work From Home” policies, and brace for the financial impact of the pandemic.  While a heightened focus on these critical areas right now is understandable, it is important now more than ever for companies and their compliance officers to remind employees, especially those responsible for facilitating the acquisition and importation of goods and supplies from abroad, of the company’s commitment to ethical business practices.

  1. Emphasize Reporting Procedures for Suspected FCPA Violations

Company management should conduct anti-corruption training for employees to ensure they are capable of recognizing unethical and potentially illegal conduct, and their responsibilities for reporting it according to company policies and procedures.  Compliance departments should test their reporting procedures to ensure employees are at ease in reporting any suspected FCPA violations through multiple avenues, and compliance officers should similarly test their ability to respond appropriately to reasonable suspicions of illegal activity.

  1. Increase Screenings and Transaction Review

Finally, company management should consider increasing due diligence efforts and taking a “deeper dive” when it comes to interacting with new suppliers, agents, and distributors. For example, companies should pay particular attention to whether the individual being reviewed is related to any public officials in their country of residence, has a history of employment or business dealings with the government, and whether they previously have been the subject of any corruption complaints, investigations or negative news events.  Further, companies that have instituted quantity, financial, or country of origin thresholds for reviews of transactions, expenses, and other aspects of company business for corruption risk, should consider adjusting such thresholds to include a broader and more conservative review process, at least until the COVID-19 pandemic and related equipment and supply demands substantially decrease.

Like all Blogs, this one is for information purposes only. It is not legal advice and does not form an attorney client relationship. As you are aware, things are changing quickly and there is no clear-cut authority or bright line rules in this area. This Blog does not reflect an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand. This Blog does not address the potential impacts of the numerous other local, state, and federal orders that have been issued in response to the COVID-19 pandemic, including, without limitation, potential liability should an employee become ill, requirements regarding family leave, sick pay, and other issues.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.

For more on COVID-19 & Global Trade, see the National Law Review Coronavirus News section.

Historic Worldwide Deal Ends Oil Price War

Oil-producing nations around the world reached an unprecedented agreement over the weekend that will cut world oil output by nearly 10 percent in an effort to end the devastating price war waged worldwide this year over the price of oil. That price war had threatened to break the so-called OPEC+ alliance between members of the Organization of Petroleum Exporting Countries (OPEC), including Saudi Arabia and Iraq, and allied producer states such as Russia and Mexico; just a few weeks ago, that partnership appeared to be on life support.

But now, a deal has been struck between the OPEC+ nations and other leading producer nations, including the United States, Canada, and Brazil, under which OPEC+ nations will cut production by 9.7 million barrels a day, while the non-OPEC+ nations will consider, but have not committed to, further cuts in production. Talks had reportedly stalled at times over the last seven days, but the involvement of the non-OPEC+ nations in the agreement showed the lengths to which producer nations were willing to go to end the oil price war and is politically significant since nations like the United States have historically criticized OPEC+ production policies.

© Steptoe & Johnson PLLC. All Rights Reserved.

Brazil and India Act to Protect Employers and Employees During the COVID-19 Pandemic

The COVID-19 pandemic has altered the global workplace and international employer-employee relations in profound ways. As COVID-19 continues to spread, countries are enacting legislation and issuing guidance to support employers and employees as they confront the global crisis. In particular, Brazil, with a population of over 211 million, and India, with a population of approximately 1.3 billion, each has enacted measures to combat the ongoing economic and financial troubles caused by the COVID-19 pandemic.

Specifically, Brazil has issued federal provisional measures, including Provisional Measure No. 936 (“MP-936”) and Provisional Measure No. 927 (“MP-927”), to socialize the idea that employers may seek to reduce employees’ pay in exchange for greater job security. MP-936 provides for an Emergency Employment and Income Maintenance Program, including an Emergency Employment and Income Preservation Benefit (the “Benefit”), as well as policies for reducing salary and working hours and suspending employment agreements, and provisions for collective bargaining agreement (“CBAs”) meetings by virtual means. In particular, MP-936 and MP-927 provide for the following:

  • Salary and Hourly Reductions: MP-936 allows salary and hours reductions for up to a 90-day period. Each employee’s pay rate, hours and tenure must be preserved and reinstated upon the employee’s return to work. In the event of a reduction in salary and/or hours, the government is responsible for paying the Benefit. Employees who receive the Benefit still may receive unemployment insurance benefits. The amount of the Benefit that employees receive is based upon the amount of unemployment insurance to which they are entitled. For employees who earn less than R$3,135 or more than R$12,202.12 there is no obligation to have collective negotiations. There are various notice requirements for any salary and hours reduction, and an employer’s failure to comply may result in legal sanctions or fines. The presence of a CBA may provide for different reduction and notice requirements.
  • Suspension of Employment: MP-936 provides for suspension of employment agreements (e.g., furlough) for a period of up to 60 days, with the government paying a Benefit of 100% of the unemployment insurance to which employees are entitled. Employers are required to preserve employees’ current pay rate, hours and tenure, and employees are entitled to all employer-provided benefits. For employers who earned a gross revenue exceeding R$4,800,000 in 2019, the government will pay a Benefit of 70% of the employment insurance that employees are entitled to, provided that during the suspension period, employers pay to employeesfinancial support equal to 30% of employees’ salary. There are various notice requirements for any reduction. If employees work during a suspension, including engaging in any telework, then the suspension will be deemed not to have occurred, and legal sanctions and fines may be imposed upon employers. For employers whose income tax is calculated on the basis of actual income, financial support is deductible from the net revenue for purposes of calculating employers’ income tax. Note that redundancy terminations are considered terminations without cause, and employers have the sole discretion to determine selection criteria and severance packages.
  • Use of Accrued, Unused Paid Leave: MP-927 authorizes not only the use of accrued but unused paid leave, but also the use of holidays still being accrued, as well as holidays for which the accruing period has not even started.

India has imposed even broader employee protections that require employers to bear the heavy economic burden to support employees during the national lockdown. In response to the COVID-19 pandemic, the Indian government invoked special provisions of the Disaster Management Act, 2005 (the “DMA”) to implement a series of orders under the DMA (“Orders”) to impose a 21-day nationwide lockdown, effective March 25, 2020.

To counter the negative impact of the COVID-19 pandemic on India’s labor force, the Orders include strict directives for employers. The Orders prohibit employers from terminating any employees or contract labor during the lockdown, except for disciplinary reasons. In addition, the Orders bar employers from reducing employees’ wages. In addition, the Indian government has addressed the following issues that affect employers and employees:

  • Maintaining the Workforce: During the lockdown, employers should not reduce or stop salary payments or terminate employees. Similarly, employers may not reduce work hours and wages during the lockdown. Employers, however, may temporarily halt non-statutory benefits and postpone incentives until the business normalizes, provided that such measures adhere to employers’ internal policies, employee handbook provisions and/or employment agreements. In addition, employers may defer or suspend bonuses and annual increments for employees, subject to some narrow exceptions.
  • Paid Leave: Employers are prohibited from requiring employees to use paid time off during the lockdown. Employees, however, are entitled to use their accrued annual leave at their discretion, subject to internal policies. Employers cannot mandate that employees take unpaid leave.
  • Medical Checks: Employers may take steps to verify employees’ health, as long as such measures protect the health, safety and well-being of other employees. Such steps include, for example, requiring medical check-ups for employees who have travelled internationally. If employers pursue such measures, they must ensure that they have systems in place to ensure that employees’ medical records remain confidential and secure. Employers should be mindful not to discriminate against employees by selecting employees for medical checks based upon race or nationality.
  • Sick Time for Employees with COVID-19: Certain state governments have issued notifications/orders requiring employers to grant 28 days of paid leave to employees who have been infected with COVID-19. Employers may encourage, but not require, employees who have contracted COVID-19 to use their accrued sick leave. If necessary, employers may require COVID-19-positive employees to continue to take leave until such employees medically certify that they may return to work, during which time employers should continue to pay employees’ full wages and benefits.

©2020 Epstein Becker & Green, P.C. All rights reserved.

For more employment considerations amid the COVID-19 pandemic, see the National Law Review Coronavirus News section.

UK’s Financial Conduct Authority Consults on New Climate-Related Disclosure Requirements following TCFD Recommendations

In March 2020, the UK’s Financial Conduct Authority (the “FCA”) released a consultation paper entitled: “Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations” (“CP20/3”).

The proposal would introduce a new listing requirement for commercial companies with a Premium Listing on the London Stock Exchange. If implemented, these companies’ annual reports for financial years beginning on or after 1 January 2021, will have to include climate-related disclosure as recommended by the Taskforce on Climate-related Financial Disclosures (“TCFD”), and/or to explain any non-compliance. The deadline for comments and feedback on CP20/3 is 5 June 2020. Following consideration of the feedback received on CP20/3, the FCA aims to publish a Policy Statement, along with the finalised rules and an FCA Technical Note, later in 2020.

TCFD Recommendations

The TCFD is a task force established by the Financial Stability Board with the aim of establishing a global framework for companies to disclose the impact of climate change on their business with the aim of helping investors to understand which companies are most at risk, which are best-prepared, and which are taking decisive action on climate change.

Its recommendations were published in 2017, and recommend clear disclosure on the impact of climate-related risks in the following areas of a company’s business:

  1. Governance: the organisation’s governance around climate-related risks and opportunities;
  2. Strategy: the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning;
  3. Risk Management: the processes used by the organisation to identify, assess, and manage climate-related risk; and
  4. Metrics & Targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities.

In each category, the TCFD has recommended the specific topics to be described or disclosed, and it has provided additional general guidance and sector-specific guidance relating to financial companies (in particular, banks, insurance companies, asset owners and asset managers) and non-financial companies (energy, transportation, materials and buildings and agriculture, food, and forest products).

CP20/3 – Proposed New Disclosure Requirements

CP20/3 adopts the TCFD standards for disclosure wholesale. If adopted, UK premium-listed commercial companies (i.e., companies subject to Listing Rules 9 and 21) will have to become familiar with these standards and report in accordance with them on a comply-or-explain basis.

The comply-or-explain approach is the standard required by the UK’s Corporate Governance Code, and was adopted as the proposed standard for climate-related disclosure despite mixed feedback, as the FCA acknowledges that issuers’ capabilities are still developing in some areas, and they may not yet have the data and capabilities to fully comply with certain of the TCFD recommendations, particularly those relating to scenario analysis and setting climate-related targets. The FCA also notes it does not want to be overly prescriptive at this stage, given the evolving nature of climate-related disclosure and modelling frameworks

CP20/3 – Guidance on Existing Climate-Related Disclosure Obligations

The other key element of CP20/3 is the proposed issuance of an FCA Technical Note to clarify existing climate-related and other environmental, social and governance (“ESG”) disclosure. The FCA-proposed Technical Note is aimed at all issuers subject to existing EU legislation and rules contained in the FCA Handbook (i.e., all issuers with securities listed on the London Stock Exchange, not just those in the premium-listed segment to whom the proposed rule on TCFD disclosure will apply).

It reminds those issuers that even where climate-related risks are not mentioned by name, they may still be important, and required to be disclosed under more general disclosure and internal controls obligations. For example, this proposed Technical Note will advise issuers that their existing obligations under the Listing Rules, the Prospectus Regulation, the UK Corporate Governance Code, the Disclosure and Transparency Rules, and the Market Abuse Regulation, may all involve a review of climate-related risks and, if necessary, related disclosure.

Conclusion

The TCFD’s framework encourages businesses to face and evaluate the financial risk that climate change poses to their business, both in terms of physical risk posed by extreme weather and its consequences, and the “transition risk”, meaning the large category of risks posed by behavioural changes as well as policy changes related to mitigating climate change. The TCFD framework has the aim of moving towards helpful, comparable disclosures related to these risks. This should allow investors (and consumers and regulators) to add a new dimension to their assessment of companies, and modify their behaviour accordingly.

Investors across the board agree that ESG factors are now routinely incorporated into mainstream investment decisions, and companies are required to demonstrate their insight and oversight on these topics. It is still not the case that a single framework dominates reporting on these matters, but this consultation paper shows that the TCFD framework will continue to grow in importance, at least in the UK. The FCA believes its proposals in CP20/3 are consistent with the UK Government’s Green Finance Strategy, published in July 2019, and is a first step towards the adoption of the TCFD’s recommendations more widely within the FCA’s regulatory framework.

© Copyright 2020 Cadwalader, Wickersham & Taft LLP

ARTICLE BY the Financial Regulation practice group at Cadwalader, Wickersham & Taft LLP.
For more financial regulation, see the National Law Review Financial Institutions & Banking section.

FCA Issues Coronavirus Statement

On March 4, the UK’s Financial Conduct Authority (FCA) issued a statement on Covid-19, the novel coronavirus that originated in China in December 2019 and recently spread to Italy and Iran, among many other countries globally (the Statement).

In the Statement, the FCA explained that they are working with the Bank of England and HM Treasury to engage with firms, trade associations and industry bodies to understand the pressures they are facing. This work includes actively reviewing the contingency plans of a wide range of firms.

The FCA noted that all firms are already expected to have contingency plans in place to deal with major events such as this and that firms should be taking all reasonable steps to meet their regulatory obligations. While the FCA has no objection in principle to staff working from home or from alternative sites, firms still need to be able to, for example, use recorded lines when trading and give staff access to any compliance support they may need.

The Statement is available here.

©2020 Katten Muchin Rosenman LLP

Coronavirus – Further Updates on Travel Impact

As the Centers for Disease Control and Prevention (CDC) and World Health Organization (WHO) continue to monitor the current and potential impact of the coronavirus (COVID-19) in the United States and worldwide, the CDC and the Department of State (DOS) have updated their travel guidance by issuing warnings about new countries and raising the threat levels of previously named countries. Further, President Trump has issued a proclamation that temporarily suspends entry to the United States for foreign nationals who have been physically present in Iran within the last 14 days. We outline below the current travel advisories and will continue to provide updates as new information becomes available.

Iran:

The CDC issued a Travel Advisory alert on Iran at the Warning—Level 3 category, recommending that travelers avoid all nonessential travel.

On February 29, 2020, through a Presidential Proclamation, the U.S. government announced that effective today, March 2, 2020, at 5:00 p.m. eastern time, that it was suspending entry of foreign nationals, both immigrants and nonimmigrants, who were physically present in Iran within the last 14 days preceding their entry into the United States.

Italy:

The CDC issued a Travel Advisory alert on Italy at the Warning—Level 3 category, recommending that travelers avoid all nonessential travel. DOS maintains a Level 3 Advisory for Italy as well.

The most affected regions are Lombardy and Veneto (North Italy, Milan consular district). On February 23, 2020, the U.S. Embassy in Rome issued a Health Alert, stating that the U.S. Consulate General in Milan has suspended routine visa services until March 2, 2020. Given the continued health concerns, we expect an updated advisory shortly. However, at this time, full consular services are available at the U.S. Embassy in Rome and the U.S. Consulates General in Florence and Naples.

China:

The CDC has raised the Travel Advisory level for China to a Warning—Level 3 category, recommending that travelers avoid all nonessential travel. DOS has raised the Travel Advisory to Level 4 advising that individuals not travel to China, and to be prepared for the possibility of travel restrictions with little to no advanced notice.

The previous warnings related to China under the Presidential Proclamation, effective February 2, 2020, remain in effect. Foreign nationals who have visited China in the last 14 days may not enter the United States, and American citizens and lawful permanent residents who have been to China in the past 14 days will undergo health screenings at a prescribed list of airports. Depending on their history, individuals may receive additional travel prescriptions.

South Korea:

The CDC has raised the Travel Advisory level for South Korea to a Warning—Level 3 category, recommending that travelers avoid all nonessential travel. DOS maintains a Level 3 Advisory for South Korea as well.

Japan:

The CDC added Japan to the Travel Advisory alerts at Alert—Level 2. The CDC recommends that high-risk travelers practice enhanced precautions. As of February 21, 2020, the U.S. Embassy in Tokyo continues to provide all consular services.

Hong Kong:

The CDC has maintained a Travel Advisory level of Watch—Level 1 (Practice Usual Precautions) for Hong Kong. DOS increased the Hong Kong Travel Advisory to Level 2 (Exercise Increased Caution). Further, the U.S. Consulates in Hong Kong and Macau recommend that anyone with a pending consular appointment who resides in China, has traveled to China recently, or intends to travel to China prior to their planned trip to the United States, postpone their visa interview appointment until 14 days subsequent to their departure from China.

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

ARTICLE BY Danielle A. Porter of Mintz.
For more on coronavirus developments see the National Law Review Health Law & Managed Care section.

U.S.-China Trade Deal Shows Potential for Improved U.S. Intellectual Property Rights in China

A result of negotiating techniques from Donald Trump’s book “The Art of the Deal” or a result of strategies from the ancient Chinese military strategy treatise “The Art of War”?

Who knows, but on January 15, 2020, the United States (“U.S.”) and China signed Phase One of the Economic and Trade Agreement between the U.S. and China (the “Agreement”).  The Agreement, which is set to go into force on February 14, 2020, attempts to end or at least ease the trade war tensions between the world’s two economic behemoths.  The Agreement, amongst other issues, addresses protection and enforcement of U.S. intellectual Property (“IP”) rights in China.  While the Agreement does not resolve all IP protection and enforcement concerns faced by U.S. businesses in China, it is certainly a step in the right direction.

The importance of IP in establishing a fair and balanced bilateral economic and trade relationship is evident in the fact that the entire first two chapters of the Agreement are dedicated to IP protection and enforcement in China.  The Agreement addresses numerous areas of IP, including trade secrets, pharmaceutical related IP, patents, piracy and counterfeiting, trademarks, technology transfer, and other related topics.

The Agreement puts much of the responsibility on China to revamp its laws and develop new policies and procedures to implement the provisions of the Agreement and to address the long-standing concerns that have existed with regard to protection and enforcement of U.S. IP in China.

Discussed below are some of the areas under the Agreement where China has agreed to implement new laws and procedures to protect U.S. intellectual property.  In return, the U.S. has agreed to affirm that it already has equivalent or similar protection and enforcement mechanisms in place.

Trade Secrets

  • The definition of trade secret is expanded to include confidential business information.
  • The scope of acts that constitutes trade secret misappropriation is broadened to include electronic intrusions, breaches or inducement of a breach of duty not to disclose, and other unauthorized disclosures or uses.
  • Implements burden-shifting in civil proceedings, shifting to the accused party where the holder of a trade secret has produced evidence of a reasonable indication of trade secret misappropriation by the accused party.
  • Adopts provisional measures to prevent the use of misappropriated trade secrets.
  • Eliminates the requirement that the holder of a trade secret establishes actual losses prior to initiation of a criminal investigation for misappropriation.
  • Provides for the application of criminal procedures and penalties to address willful trade secret misappropriation through theft, fraud, physical or electronic intrusion for an unlawful purpose.
  • Prohibits the unauthorized disclosure of undisclosed information, trade secrets, or confidential business information by government personnel involved in government proceedings in which such information is submitted and provides criminal, civil, and administrative penalties for such unauthorized disclosure.

Pharmaceutical-Related Intellectual Property

  • Permits pharmaceutical patent applicants to rely on supplemental data to satisfy relevant requirements for patentability, during patent examination proceedings, patent review proceedings, and judicial proceedings.
  • Provides (a) a system to provide notice to a patent holder, licensee, or holder of marketing approval, that a person is seeking to market that product during the term of an applicable patent claiming the approved product or its approved method of use; (b) adequate time and opportunity for such a patent holder to timely seek available remedies; and (c) procedures for judicial or administrative proceedings and expeditious remedies, for resolution of disputes concerning the validity or infringement of an applicable patent claiming an approved pharmaceutical product.
  • With regard to pharmaceutical-related patents on new products and methods of use, provides an extension of the patent term, due to unreasonable curtailment of the patent term as a result of the marketing approval process, of up to five years, and may limit the resulting effective patent term to no more than 14 years from the date of marketing approval in China.

Patents

  • Provides patent term extensions to compensate for unreasonable delays that occur in granting the patent or during pharmaceutical product marketing approvals. For this provision, an unreasonable delay shall at least include a delay in the issuance of the patent of more than four years from the date of filing, or three years after a request for examination of the application, whichever is later.

Piracy and Counterfeiting on E-Commerce Platforms

  • Provides enforcement procedures that permit effective and expeditious action by right holders against infringement that occurs in the online environment, including an effective notice and takedown system to address infringement.
  • Provides that e-commerce platforms may have their operating licenses revoked for repeated failures to curb the sale of counterfeit or pirated goods.

Geographical Indications

  • Provides that when determining whether a term is generic in China, how consumers understand the term in China will be taken in to account.

Manufacture and Export of Pirated and Counterfeit Goods

  • Provides effective and expeditious enforcement action against the related products of counterfeit medicines and biologics, including active pharmaceutical ingredients, bulk chemicals, and biological substances.
  • Sharing with the U.S. the registration information of pharmaceutical raw material sites that have been inspected and that comply with the requirements of Chinese laws and regulations; and publishing data on enforcement measures, including seizures, revocations of business licenses, fines, and other actions taken by the National Medical Products Administration, Ministry of Industry and Information Technology, or any successor entity.
  • Significantly increasing the number of enforcement actions and publishing data online on the measurable impact of these actions each quarter.
  • Seizing and destroying counterfeit or pirated goods, including the materials and implements used in the manufacture or creation of such pirated or counterfeit goods.
  • Requiring a counterfeiter to pay right holders the profits from infringement or damages adequate to compensate for the injury from the infringement.
  • Increase the number of trained personnel to inspect for counterfeit and pirated goods.
  • Ensure that all government agencies and all entities that the government owns or controls install and use only licensed software.

Trademarks

  • Provide for criminal enforcement if there is “reasonable suspicion” based on articulable facts that a criminal violation of an intellectual property right has occurred.
  • Provide civil and criminal penalties sufficient to deter future intellectual property theft or infringements. 

Implementation

  • Within 30 working days after the date of entry into force of this Agreement, China will present an action plan to strengthen intellectual property protection and shall include measures that China will take to implement its obligations and the date by which each measure will go into effect.

Technology Transfer

  • Provides that U.S. businesses are able to operate openly and freely in China without any force or pressure to transfer key technology as a requirement for operating in China.

What does this all mean?  Well it’s hard to tell really at this point as the Agreement does not actually implement any new laws or regulations, but rather is a bunch of promises between China and the U.S.  Until China implements new laws or regulations to fulfill its promises we can really only speculate on its true impact.  Of course, implementation of new laws or regulations is only effective if there is suitable enforcement to back it up.  However, most would agree that if China does fulfill its obligations we can expect to see stronger economic and trade relations between the U.S. and China, in particular giving U.S. businesses greater confidence and predictability in protecting and enforcing their IP rights in China.

© 2020 Ward and Smith, P.A.. All Rights Reserved.

For more on international trade negotiations, see the National Law Review Antitrust & Trade Regulation law section.

National Security vs. Investment: Are we striking the right balance?

The U.S. Treasury Department’s final regulations, giving it more power to scrutinize any national security risks that may arise from deals between U.S. and foreign companies, are scheduled to go into effect this week, Feb. 13, 2020.

CFIUS New Regulations

The regs implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and provide the interagency Committee on Foreign Investment in the United States (CFIUS) broader authority over certain investments and real estate transactions. Critics say the regs will change cross-border M&A deal-making for years to come, and advance increasingly protectionist U.S. policy.

Treasury Secretary Steven T. Mnuchin said the regs will strengthen national security and “modernize the investment review process,” while maintaining “our nation’s open investment policy by encouraging investment in American businesses and workers, and by providing clarity and certainty regarding the types of transactions that are covered.”

We have previously described in the MoginRubin Blog how not everyone shares the Treasury Secretary’s respect for CFIUS.

Financial writer and author Robert Teitelman described it in an article for Barron’s as “a creature from the shadows of the administrative state” that “defines obscurity in the federal government.” He said it “encourages the very practices the administration condemns in China.” Hernan Cristerna, co-head of global mergers and acquisitions at JPMorgan Chase, told the New York Times that CFIUS is the “No. 1 weapon in the Trump administration’s protectionist arsenal” and called it “the ultimate regulatory bazooka.”

Enacted in August 2018, FIRRMA gives CFIUS much greater reach into deals where national security is a potential issue. Specifically, the law extends CFIUS’s jurisdiction over “certain non-controlling investments into U.S. businesses involved in critical technology, critical infrastructure, or sensitive personal data. Big data, artificial intelligence, nanotechnology, and biotechnology are among the specific technologies the law was designed to protect. It also establishes CFIUS’s jurisdiction over real estate deals.

The regulations limit CFIUS’s application of its expanded jurisdiction to “certain categories of foreign persons,” and has “initially” designated a handful of countries as “excepted foreign states.” They are Australia, Canada, and the U.K., countries with which the U.S. has “robust intelligence sharing and defense industrial base integration mechanisms.” The list may be expanded in the future, according to the regs.

‘Controlling interest’ redefined.

Attorneys, in-house counsel and other professionals deeply involved in cross-border transactions are already experiencing some nuts and bolts changes that other professionals want to be aware of.

For example, deals that would give foreign companies “controlling interest” are no longer the only deals the committee will examine; it is now interested in deals that would transfer non-controlling but “substantial interest” when critical technologies, critical infrastructure, or the private data of U.S. citizens are involved. Deals that fall into these categories now require filing; previously they were optional. Deals that would once have sailed through scrutiny may now be delayed by investigations. CFIUS also has more time to review transactions. The initial stage ends within 45 days and the second phase can last from 45 to 60 days. Filing fees are set but cannot be more than 1% of the value of the transaction or $300,000, whichever figure is lower. And, of course, there is increased risk that they be ultimately be blocked.

The regs include a new definition of “principal place of business” as the “primary location where an entity’s management directs, controls, or coordinates the entity’s activities, or, in the case of an investment fund, where the fund’s activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent.” If the entity is determined to be in the U.S. and has represented in its most recent submission or filing to a U.S. or foreign government that if either its principal place of business, principal office and place of business, address of principal executive offices, address of headquarters, or equivalent, is outside the U.S. then that location is deemed the entity’s principal place of business unless it can prove that the location has changed since the filing.

These new regulations will impact many purely private cross-border transactions, especially in the areas of critical infrastructure, sensitive personal data, and real estate.

Early consideration important.

M&A counsel must now consider CFIUS implications early-on, not only to avoid delay and frustration, but to account for CFIUS clearance in deal timing and closing deadlines. Fines may be levied if CFIUS notices are not timely filed.

Fund managers who make large investments in U.S. companies can also expect to be asked to represent in deal documents that their funds or investors do not require a mandatory CFIUS filing.

For more background and additional insights, please read our previous post, CFIUS: A Guardian of National Security or a Protectionist Tool? Also, you can download the regulations from the MoginRubin website:  Part-800-Final-Rule-Jan-17-2020  & Part-802-Final-Rule-Jan-17-2020

© MoginRubin LLP

ARTICLE BY Dan Mogin and  Jennifer M. Oliver of MoginRubin.
For more on CFIUS regulations, see the National Law Review Global Law section.

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.

U.S. Halting Travel to the U.S. By All Foreign Nationals Who Have Been in China within the last 14 days

The Trump Administration has publicly announced that on 5 p.m. eastern time Sunday, February 2, 2020, it will deny entry to all foreign nationals who have been in China within the last 14 days (since January 19, 2020). This ban does not apply to the following individuals:

(1) Lawful permanent residents (Green Card holders);

(2) Spouses of U.S. citizens and lawful permanent residents;

(3) The parent or legal guardian of a U.S. citizen or lawful permanent resident who is unmarried and under the age of 21;

(4) The siblings of U.S. citizens and lawful permanent residents, provided both are unmarried and under the age of 21;

(5) The child, foster child, prospective adoptee or ward of a U.S. citizen or lawful permanent resident;

(6) Crew members traveling as air or sea crew;

(7) Any foreign national traveling at the invitation of the U.S. government to assist with containing or mitigating the coronavirus;

(8) Foreign nationals holding diplomatic visas, including dependents of such individuals holding derivative visas;

(9) Foreign nationals the CDC has determined would not pose a significant risk to the U.S.; and

(10) Foreign nationals whose entry is determined to be in the national interest or further important law enforcement objectives.

Therefore, the ban applies to any foreign nationals holding nonimmigrant visas such as H, L, O, E, among others, who have traveled in China within the last 14 days (since January 19, 2020).

Any foreign nationals who believe they are subject to this ban may want to explore traveling back into the U.S. before the imposition of the ban at 5 p.m. eastern time Sunday, February 2, 2020.

U.S. citizens who have been in the Hubei Province in the last 14 days will be subject to up to 14 days of mandatory quarantine upon return to the United States. U.S. citizens returning from the rest of mainland China who have been there in the last 14 days will undergo screening at US ports of entry and up to 14 days of self-monitoring.

This ban will remain in effect indefinitely. However, every 15 days, the Secretary of Health and Human Services will recommend to the President whether to continue, modify or terminate the ban.

We will provide updates if more information becomes available.

©2020 Greenberg Traurig, LLP. All rights reserved.

For more US Travel Bans, see the National Law Review Immigration Law section.