Tag: Trade

Espionage and Export Controls: iPhone Hack Highlights New World of Warfare

iPhone HackLast week, researchers at Citizen Lab uncovered sophisticated new spyware that allowed hackers to take complete control of anyone’s iPhone, turning the phone into a pocket-spy to intercept communications, track movements and harvest personal data. The malicious software, codenamed “Pegasus,” is believed to have been developed by the NSO Group, an Israeli company (whose majority shareholder is a San Francisco based private equity firm) that describes itself as a “leader in cyber warfare” and sells its software — with a price tag of $1 million – primarily to foreign governments. The software apparently took advantage of three previously unknown security flaws in Apple’s iOS software, and was described by experts as “the most sophisticated” ever seen on the market. Apple quickly released a patch of its software, iOS 9.3.5, and urged users to download it immediately.

Citizen Lab learned about Pegasus from Ahmed Mansoor, a UAE human rights activist, who received text messages baiting him to click on a link to discover “new secrets about the torture” of Emirati prisoners. Mr. Mansoor had been prey to hackers before, so he contacted Citizen Lab. When researchers tested the link, they discovered software had been remotely implanted onto the phone, and brought in Lookout, a mobile security firm, to reverse-engineer the spyware. Citizen Lab later identified the same software as having been used to track a Mexican journalist whose writings have criticized Mexico’s President. Citizen Lab and Lookout also determined that Pegasus could have been used across Turkey, Israel, Thailand, Qatar, Kenya, Uzbekistan, Mozambique, Morocco, Yemen, Hungary, Saudi Arabia, Nigeria, and Bahrain, based on domains registered by NSO.

NSO Group, the architect of Pegasus, claims to  provide “authorized governments with technology that helps them combat terror and crime,” insisting that its products are only used in lawful ways., NSO spokesperson Zamir Dahbash told reporters that the company “fully complies with strict export control laws and regulations.” The Citizen Lab researcher who disassembled the malicious program, however, compared it to “defusing a bomb.” All of which raises the question – what laws or regulations govern the export of cyber-weapons by an Israeli firm (likely controlled by U.S. investors) to foreign governments around the world?

Cyber weapons are becoming increasingly interchangeable with traditional weapons. Governments (or terrorists) no longer need bombs or missiles to inflict large-scale destruction, such as taking down a power grid, since such attacks can now be conducted from anywhere there is a computer. Do export controls – which have long been used as foreign policy and national security tools, and which would regulate the transfer of traditional weapons – play any real role in regulating the transfer of weapons of cyber-surveillance or destruction? In fact, the legal framework underlying current export controls has not caught up (and maybe never will) to the capabilities of technological tools used in cyberwarfare. Proposals to regulate malware have been met with resistance from the technology industry because malware technology is often dual-use and the practical implications of requiring licenses would impede technological innovation and business activities in drastic ways.

The Wassenaar Arrangement

The Wassenaar Arrangement (WA) was established in 1996 as a multilateral nonproliferation regime to promote regional security and stability through greater transparency and responsibility in the transfer of arms and sensitive technologies. The United States is a member. Israel is not, but has aligned its export controls with Wassennaar lists.

In December 2013, the list of export controlled technologies under WA was amended to include commercial surveillance software, largely to curb human rights abuses by repressive governments’ use of spyware on citizens. Earlier this year, the Department of Commerce issued recommendations that the definition of “intrusion software” in the WA be modified to encompass the concept of “authorization” so that malware such as Pegasus, in which the user does not truly understand the nature of the consequences, would be controlled. Those proposals have not been implemented.

U.S. Export Controls of Malware

In 2015, following data breaches at the Officer of Personnel Management and several private companies, the Department of Commerce published proposed rules to harmonize concepts embedded in the WA into the U.S. regulatory framework for export controls. One critical proposal was a definition of “intrusion software” to require a license for the export and use of malware tools. But the definition covered much more than malware. Cybersecurity experts were alarmed by the rule’s over-inclusive and vague language. The rules would have impeded critical business activities, stifled international research and cross-border exchanges of technology, and hindered response to cyber threats.

NSO Group has been described by researchers as “incredibly committed to stealth, and  reportedly has close partnerships with other Israeli surveillance firms that seek to sell spyware, suggesting an inevitable increase in cyber mayhem. As malware becomes more sophisticated, widespread, and threatening, the need for strictly tailored export controls is not going to go away.

Regulating software is challenging at least in part, because there is no workable legal definition of what constitutes a cyber weapon. Because malware is largely dual-use, the only way to determine whether particular software constitutes a cyber weapon is retroactively. If software has been used as a weapon, it is considered a cyber weapon. But that definition arrives far too late to control the dissemination of the code. Moreover, controlling  components of that software would likely be over-inclusive, since the same code that can exploit flaws to break in to devices can also have benign uses, such as detecting vulnerabilities to help manufacturers like Apple learn what needs patching. Another challenge is that requiring  export licenses can take months, which, in the fast-moving tech world is as good as denial.

The revelation of the Pegasus iPhone spyware highlights questions that have perplexed national security and export control experts in recent years. As the use and sophistication of malware continue their explosive growth, not only must individuals and governments face the  chilling realities of cyber warfare, but regulators must quickly understand the technological issues, address the risks, and work with the cyber security and technological communities to find a path forward.

ARTICLE BY Fatema K. Merchant & Laura E. Jehl  of Sheppard, Mullin, Richter & Hampton LLP
Copyright © 2016, Sheppard Mullin Richter & Hampton LLP.

Considerations for Travel to Iran to Explore Relaxed Trade Opportunities

travel trade opportunities IranBefore booking your airfare, be mindful of these potential issues.

In light of liberalized trade with Iran made possible by the Office of Foreign Assets Control’s (OFAC’s) General License H and the relaxation of US secondary sanctions, personnel of a non-US company, whether or not owned or controlled by a US parent, may be considering travelling to Iran to explore potential business opportunities. Here are some key points to consider as you make your plans.

Travel to Iran by US Persons Is Permitted

An OFAC General License provided in 31 CFR § 560.210(d) authorizes travel to Iran from the United States or by US Persons (US citizens and US permanent resident aliens]) from outside the United States to do market research or gather business opportunity information. This authorization includes

  • importation or exportation of accompanied baggage for personal use;

  • maintenance within Iran, including payment of living expenses;

  • acquisition of goods or services for personal use in Iran; and

  • arrangement or facilitation of such travel, including air, sea, or land voyages.

US State Department Warning for Travel to Iran

On August 22, the US Department of State (State Department) reissued a travel warning for Iran that reiterates and highlights US citizens’ risk of arrest and detention, particularly dual national Iranian Americans. Iranian officials continue to detain or prevent foreigners (in particular, dual nationals of Iran and western countries, including the United States) from leaving Iran. The State Department says US citizens traveling to Iran should very carefully weigh the risks of doing so and consider postponing their travel. The State Department additionally instructs US citizens who reside in Iran to closely follow media reports, monitor local conditions, and evaluate the risks of remaining in the country.

The State Department advises that Iranian authorities continue to unjustly detain and imprison US citizens, including students, journalists, business travelers, and academics, on charges that include espionage and posing a threat to national security. Iranian authorities have also prevented a number of Iranian American citizens who traveled to Iran for personal or professional reasons from departing, in some cases for months.

The US government does not have diplomatic or consular relations with Iran, and therefore cannot provide protection or routine consular services to US citizens in Iran. The Swiss government, acting through its embassy in Tehran, serves as a protecting power for US interests in Iran. The Foreign Interests Section at the Swiss Embassy provides a limited range of consular services that may require significantly more processing time than at US embassies or consulates.

The Iranian government does not recognize dual citizenship and will not allow the Swiss to provide protective services for US citizens who are also Iranian nationals. The Iranian authorities determine a dual national’s Iranian citizenship without regard to the dual national’s personal wishes. Consular access to detained US citizens without dual nationality is often denied as well.

Loss of Visa Waiver Privileges for Entry into the United States by Non-US Citizens

The US Visa Waiver Program (VWP) Improvement and Terrorist Travel Prevention Act of 2015 (the Act), which took effect in January 2016, has adversely affected some travelers to Iran who wish to enter the United States. Under the Act, travelers in the following categories are no longer eligible to travel or be admitted to the United States under the VWP:

  • Nationals of VWP countries who have traveled to or been present in Iran, Iraq, Sudan, or Syria on or after March 1, 2011 (with limited exceptions for travel for diplomatic or military purposes in the service of a VWP country)

  • Nationals of VWP countries who are also nationals of Iran, Iraq, Sudan, or Syria

These individuals will still be able to apply for a visa using the regular immigration process at US embassies or consulates.

As of January 21, 2016, travelers who currently have valid Electronic System for Travel Authorizations (ESTAs) and who have previously indicated that they hold dual nationality with one of the four countries listed above on their ESTA applications will have their current ESTAs revoked.

The US Department of Homeland Security’s secretary may waive these restrictions if he determines that such a waiver is in the law enforcement or national security interests of the United States. Such waivers will be granted only on a case-by-case basis. As a general matter, categories of travelers who may be eligible for a waiver include

  • individuals who traveled to Iran, Iraq, Sudan, or Syria on behalf of international organizations, regional organizations, and subnational governments on official duty;

  • individuals who traveled to Iran, Iraq, Sudan, or Syria on behalf of a humanitarian nongovernmental organization on official duty;

  • individuals who traveled to Iran, Iraq, Sudan, or Syria as a journalist for reporting purposes;

  • individuals who traveled to Iran for legitimate business-related purposes following the conclusion of the Joint Comprehensive Plan of Action (July 14, 2015); and

  • individuals who traveled to Iraq for legitimate business-related purposes.

The Department of Homeland Security does not specifically define what travel to Iran for “legitimate business-related purposes” means, how the department applies the definition, or what evidence is necessary to sustain such a claim and successfully receive relief. Anecdotal evidence suggests that administrative avenues for relief from the Act’s provisions to enter the United States after travel to Iran for “legitimate business-related purposes” are obscure. Travelers to Iran who want to enter the United States and require a visa to do so should apply through the routine visa application process at their appropriate US embassy or consulate and not expect rapid administrative agency relief for the effects of the Act.

ARTICLE BY Louis Rothberg, Margaret M. Gatti & Marynell DeVaughn of Morgan, Lewis & Bockius LLP
Copyright © 2016 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Made in the USA (For the Most Part)

made in the USANewspaper headlines report a new economic trend—manufacturing is returning to the United States. The country’s industrial production grew by 0.7 percent in July, its biggest jump since November 2014. This number represents everything made by factories, mines, and utilities. Before companies start slapping “Made in the USA” labels on their wares, they need to make sure they are familiar with the legal requirements to do so.

The Federal Trade Commission (the FTC) monitors the marketplace and aims to keep businesses from misleading consumers. Within the FTC’s jurisdiction is regulating “Made in the USA” claims.

If a product is labeled as “Made in the USA,” without any qualification, it must be “all or virtually all” made in the United States. “[A]ll significant parts and processing that go into the product must be of U.S. origin. That is, the product should contain no – or negligible – foreign content.” The FTC contemplates the site of final assembly or processing, the proportion of manufacturing costs paid to the U.S., and how detached the foreign material is from the finished product. For many businesses, this standard can be hard, if not impossible, to meet.

Since January 2015, the FTC has issued 46 letters to companies asserting misleading U.S. origin claims on a wide range of products, such as cookware, snow blowers, auto parts and pet products.

For example, the FTC recently determined that Shinola—a Detroit-based manufacturer of high-end watches, bicycles, and leather goods—did not meet it. Shinola advertises its products with the slogans “Built in the USA” and “Built in Detroit.” But in June of this year, the FTC called this labeling misleading because “100 percent of the cost of materials used to make certain watches . . . [and] more than 70 percent of the cost of the materials used to make certain belts” goes to imported materials. For example, Shinola’s watches incorporate Swiss-made timekeeping components.

Shinola’s founder had a good reason for why his company incorporated foreign parts:  many of the components are unavailable in the U.S. The components are imported to Detroit where Shinola’s 400 employees assemble watches in the company’s factory. The FTC, however, applied its “net impression” analysis and determined that Shinola’s slogans contradict reality. Shinola’s advertisements will now read “Built in Detroit using Swiss and Imported Parts.”

In light of the FTC’s stance on U.S. origin claims, companies should follow FTC decisions and exercise caution when saying “Made in the USA.” There is no bright line rule for whether a product is “all or virtually all” made in the USA. Companies should consider how their products fit within the FTC’s framework and only then decide whether their merchandise has, according to the FTC, been “Made in the USA.”

ARTICLE BY Brittany Robbins of Schiff Hardin LLP

© 2016 Schiff Hardin LLP

The Future of Business Relations in Cuba – Commentary from a Seasoned Customs Attorney

cuba_800_11429Since the December 2014 reopening of diplomatic relations, access to Cuba has been greatly widened, with new changes to regulations taking place as recently as late January.  These developments signal opportunities for legal service providers to assist clients who are seeking advice on business development opportunities in Cuba. However, effective advising requires a thorough understanding of the history of the U.S. embargo on Cuba and the changes in the laws themselves.

Peter Quinter, Chair of the Customs and International Trade Law Group at GrayRobinson P.A., offers a unique perspective regarding U.S. and Cuban relations as a former attorney in the Office of Chief Counsel for U.S. Customs in Miami. As a South Florida resident surrounded by the stories about the 1959 Cuban Revolution and Fidel Castro, Peter was fascinated with the unique relationship between the two countries. As an attorney with U.S. Customs, he was also responsible for enforcing the U.S. embargo of Cuba. I recently had the opportunity to discuss his perspective on the progress of reopening relations with Cuba following his participation in a panel discussion at the recent Marketing Partner Forum.1

Since the imposition of the U.S. embargo on Cuba 55 years ago, Cuba’s economy has remained relatively stagnant in growth. I was initially focused on the idea that only the U.S. refused to trade with Cuba, and that despite access to everywhere else in the world, their economy did not grow. Mr. Quinter corrected my assumption, stating “[t]here were multiple embargoes, but they disappeared long ago. Only the U.S. retains the embargo, and it was U.S. policy to punish any country doing business with Cuba.”  In fact, the UN General Assembly has nearly unanimously voted to condemn the embargo every year since 1992. The U.S. only garnered support from one other nation –Israel– in the most recent vote on the embargo in October 2015.

Despite the standing embargo, the U.S. is now poised to begin contributing to the significant growth of the Cuban economy. Although most U.S. companies are still prohibited from doing business in Cuba, the relaxed rules and opening of embassies in D.C. and Havana have allowed a few major companies to start doing business in Cuba including Verizon, Netflix, and AirBNB. Mr. Quinter believes many industries have the opportunity to rapidly develop in Cuba due to the expansion of diplomatic relations: “Logistics, warehousing, hospitality, aviation, travel agents, sports, education..to name a few.” These developments signal new opportunities for U.S. law firms to advise companies in their up-and-coming dealings in Cuba.

Like business dealings in any country, it is imperative to understand and work within the laws of Cuba’s socialist government. Mr. Quinter’s extensive experience in advising clients on OFAC regulations and policies (Office of Foreign Assets Control) for 26 years makes him uniquely positioned to comment on the current state of U.S. law firm involvement in this rapidly evolving area. During the presentation, he stated that few firms are approaching this opportunity in the appropriate manner. In our follow up discussion, he called attention to this error: “Suddenly, numerous law firms are ‘experts’ in this, and are attempting to be business brokers, instead of legal advisors.”

As a legal advisor, Mr. Quinter elaborated that law firms’ focus should remain on advising U.S. persons and companies about the relevant legal requirements that allow these entities to travel to, trade with, or invest in Cuba. A major part of this practice is determining whether a license is required to do any of these things, and if so, obtaining the license from the U.S. Treasury for the client. Once the appropriate license is obtained, then the firm will need to assist the client in working with the Cuban government.

Law firms can add value to their practice by beginning to form new partnerships now so they can be better equipped to help their clients establish businesses down the line. Mr. Quinter advises that traveling to Cuba, experiencing the culture, and introducing themselves to the community is an excellent way for law firms to equip themselves to guide clients who are looking to do business in Cuba. In May 2015, Mr. Quinter, as Chair of the Florida Bar’s International Law Section, led the largest lawyer delegation ever to visit Cuba. While the group was in Cuba, they met with lawyers, journalists, and dissidents to get a better lay of the land and to help move toward opening up business relationships. Mr. Quinter has since returned to Cuba in October 2015 on behalf of a client meeting with government officials.

The upcoming 2016 presidential elections could greatly impact the progress being made in Cuba. Several presidential hopefuls have made their sentiments toward the embargo known: Republican candidate Marco Rubio staunchly for the embargo, and Democratic candidate Hillary Clinton ardently against it. However, Mr. Quinter posited, “What has happened to date is legally reversible, but realistically not.” He believes the embargo will eventually meet its end: “As more investment in and trade with and authorized travel by Americans occur to Cuba, even the few people who support the U.S. embargo (Cubans call it a ‘blockade’) will realize the embargo is counterproductive, and a leftover from the Cold War of the 1950’s and 1960’s.”

At the moment, Mr. Quinter acknowledges that in the short term, OFAC regulations continue to make it difficult to do business in Cuba. However, he is hopeful for the future: “In 10 years, we will look back and wonder why the U.S. did not terminate the U.S. embargo of Cuba decades ago, and we will recognize the leadership of President Obama in having the courage and vision to starting the process.” In fact, President Obama has recently announced that he will be the first sitting U.S. president to visit Cuba in over the 85 years. This is a signal of the U.S.’s overall sentiment toward Cuba, but only time will tell how U.S.-Cuban relations are progressing.

Article By Nicole Cudiamat Minnis of The National Law Review / The National Law Forum LLC

Copyright ©2016 National Law Forum, LLC

 

1 Mr. Quinter was a part of a panel at the Legal Executives Institute 23rd Annual Marketing Partner Forum, held January 20-22nd in Orlando. He was joined by Eddy Arriola, Chairman of the Board & Chief Executive Officer, Apollo Bank for the presentation, “From Swords to Plowshares: Cuba, Legal Business Development and Industrial (R)evolution (Breakout)”.

What Cuba Wants From Investors

American investors have made their way into Cuba. What Cuba Wants From Investors Just this week, the U.S. Treasury Department has approved the first significant U.S. business investment in Cuba since 1959: the Oggun tractor factory. This plant represents a $5 million to $10 million investment by an American company in Cuba.

​Both countries seem serious about moving their recently-resurrected commercial relationship forward. The U.S. and Cuba have entered into an agreement to resume commercial flights between the two countries the same week Cuba’s Minister of Foreign Trade and Investments, along with other officials from the Ministry of Foreign Affairs, Cuba’s Central Bank, and the Cuban Chamber of Commerce, have come to meet with the U.S. Secretary of Commerce to discuss how the two countries could further bilateral commercial relations.

While the focus of politicians’ rhetoric and scholars’ analysis has been on either what Americans are allowed to do, or on what Americans should want to do in Cuba, attention should be paid to what Cuba wants from its investors.

Cuba Wants Investors

First, there can be no doubt that Cuba wants investors.

In September 2013, Cuba created a Special Development Zone at Mariel (Zona Especial de Desarrollo Mariel). This $900 million port was formed in November 2013, 30 miles west of Havana, with the express purpose of attracting foreign investment. Many Americans are already familiar with Mariel, but remember it for the 1980 mass boatlift that carried thousands of Cuban refugees to America’s shores.  Instead of being a point of departure, Mariel is now a destination for foreign capital.

A few months after the creation of the Special Development Zone, Cuba’s National Assembly unanimously passed the Foreign Investment Act (Law 118) on March 29, 2014.  Law 118 promises foreign investors tax breaks and legal protections for their investments.

These far-reaching overtures to potential foreign investors were not made, however, without certain conditions.

Cuba Wants Investments in Particular Sectors

The Foreign Investment Act delineates, among other things, which investment vehicles are permissible, how investment shares may be transferred, who may be hired to work on the investment projects, and how disputes may be resolved.

Cuba has also specified in what it wants foreigners to invest. Last year, Cuba published a Portfolio of Opportunities for Foreign Investment detailing 326 projects in twelve sectors ripe for foreign investment:

  1. Tourism – 94 Projects

  2. Oil – 86 Projects

  3. Agriculture and Food – 40 Projects

  4. Renewable Energy – 22 Projects

  5. Industrial – 21 Projects

  6. Mining – 15 Projects

  7. Transportation – 15 Projects

  8. Construction – 14 Projects

  9. Biotechnology and Medicine – 9 Projects

  10. Business – 4 Projects

  11. Health – 3 Projects

  12. Audiovisual – 3 Projects

The highest number of projects was, not surprisingly, in the tourism sector. Cuba’s official policy on tourism investment is to direct foreign capital towards building or reconstructing new hotels and corresponding infrastructures. The President of Cuba’s Chamber of Commerce has noted the need to increase hotel capacities and standards in Havana and other heritage cities. So far, 74 hotel marketing and administration contracts have been signed, and these include almost 20 contracts with foreign firms.

Interestingly, Cuba has expressed a desire to attract foreign chains to its coasts, and is reportedly working on establishing agreements with renowned international chains across 58 facilities. Cuba is also promoting real estate development, including golf courses, marinas, and theme parks. Cuba has predicted that it will be one of the Caribbean’s top golfing destinations, and has already created two joint ventures, with British and Chinese investors, responsible for hotel construction. These projects are said to be worth over $400 million.

Furthering its efforts to attract investment in its tourism sector, Cuba is hosting its 36th International Tourism Fair (FITCUBA 2016) this year, which will be dedicated to Cuba’s culture and will feature Canada as the guest of honor.  Canada represents one of the highest sources of visitors to Cuba each year.

Notably, the Beacon Council, Miami-Dade County’s official economic development partnership, has identified seven target industries Miami’s business leaders should focus on:

  • Aviation

  • Banking and Finance

  • Creative Design

  • Hospitality and Tourism

  • Information Technology

  • Life Sciences and Healthcare

  • Trade and Logistics

The overlap between Cuba’s and Miami’s lists of target industries, along with Miami’s geographical proximity to Cuba and supply of Spanish-speaking professionals make the city an obvious key player in the development of Cuba’s business sector.

There are certain sectors, however, in which Cuba will not allow private ownership.

Cuba Does Not Want Investments in Particular Sectors

Notably, last December, Cuba’s official newspaper, the Granma, published an article titled, “Open Also Your Mind to Foreign Investment,” encouraging the Cuban people to embrace foreign investment. Cuban officials have reiterated that these changes in economic policy will not threaten the country’s socialist regime. Cuba’s policies expressly prohibit investment in sectors that may threaten Cuba’s political landscape.

For example, the Foreign Investment Act makes it illegal for a foreigner to invest in education services for Cubans and in the armed forces. Cuba’s Constitution also states that Cuba’s press, radio, television, film industry, and other mass media can never be privately owned.

These carve-outs are consistent with the Cuban government’s assurances to its people: Cuba is importing only capitalists’ capital, not their ideologies.

While it has been said that profit is apolitical, investors should not ignore the political contours of Cuba’s budding foreign investment regulations, as these may impact their investment opportunities.

ARTICLE BY Jose M Ferrer & Yasmin Fernandez-Acuña of Bilzin Sumberg Baena Price & Axelrod LLP
© 2016 Bilzin Sumberg Baena Price & Axelrod LLP

Further Relaxation of Sanctions for Commercial Aircraft Operations in Cuba

cuba_800_11429On January 27, the US Department of Commerce’s Bureau of Industry and Security (BIS) and the Treasury Department’s Office of Foreign Assets Control (OFAC), took steps to further ease trade restrictions against Cuba, including transactions relating to the export and operation of civil aircraft in Cuba.[1] In order to sell or lease a commercial aircraft to an airline in Cuba, a US national must obtain licenses for each transaction from BIS and OFAC. The changes by BIS relax its licensing policies for certain transactions with Cuba and Cuban nationals, while OFAC lifted financing and payment restrictions for authorized exports, and broadened the scope of authorizations for travel to and from Cuba.

On February 16, the United States and Cuba announced the resumption of scheduled commercial air services between the two countries, and the US Department of Transportation (DOT) invited US air carriers to apply for permission to operate scheduled flights to and from Cuba.

As outlined below, these actions may lead to easier opportunities to provide aircraft leasing and related services to prospective customers in Cuba. They also will facilitate travel between the United States and Cuba by allowing US and Cuban airlines to fly scheduled flights between the two countries.

BIS Eases Licensing Policy for Exports of Items Necessary to Ensure Civil Aviation Safety

In light of moves earlier in 2015 to loosen restrictions on trade with Cuba, air travel to and from Cuba has significantly increased in that time. The policy change announced by BIS on January 27 emphasizes “the importance of civil aviation safety and . . . recognize[s] that access to aircraft used in international air transportation that meet US Federal Aviation Administration and European Aviation Safety Agency operating standards by Cuban state-owned enterprises contributes to that safety.”

In its notice, BIS indicated that it would move to generally approve license applications for the export of items for the safe operation of commercial aircraft in lieu of reviewing such applications on a case-by-case basis. This policy includes approving license applications for the export of commercial aircraft leased to Cuban state-owned enterprises.

Both commercial passenger and cargo aircraft are eligible for treatment under this revised policy of license approval. However, BIS will continue to generally deny license applications for exports or re-exports of goods (including aircraft) for use by the Cuban military, police, intelligence and security services. BIS also will generally deny such license applications for the export or re-export of goods for use by Cuban government or state-owned entities that primarily generate revenue for the state, including those engaged in tourism and extraction of minerals or raw materials.

BIS also will move from a general policy of denial to a policy of case-by-case review for applications to export certain items to “meet the needs of the Cuban people,” including those to Cuban state-owned entities that provide goods and services for the use and benefit of the Cuban people. This policy covers a number of categories, including goods for agricultural production, artistic endeavors, education, food processing, disaster preparedness, public health and sanitation, and public transportation.

OFAC Authorizes Certain Arrangements With Cuban Airlines to Facilitate Authorized Travel to Cuba

In conjunction with BIS, OFAC published its own regulatory amendments to ease restrictions on certain transactions with Cuba and Cuban nationals, including measures to facilitate air carrier services with Cuban airlines.[2] OFAC’s amendments authorize the entry by US persons into blocked space, code-sharing and leasing arrangements with Cuban nationals to facilitate the provision of authorized air carrier services. OFAC also is allowing travel-related and other transactions directly incident to the facilitation of the temporary sojourn of aircraft authorized for travel to Cuba. This allows US companies to engage with Cuba for services by personnel required for normal aircraft operation, such as aircraft crew, or to provide services to an aircraft on the ground in Cuba. These allowances are part of a larger expansion of authorized travel to Cuba—from organizing professional meetings, professional sports competitions and other events, to the creation and dissemination of artwork and informational materials.

Resumption of Scheduled Air Service Between the United States and Cuba

The memorandum of understanding signed by the United States and Cuba on February 16 allows for the re-establishment of scheduled commercial air service between both countries. For more than 50 years, there have been no scheduled flights between the United States and Cuba. As a result of the new agreement, a total of 110 daily scheduled round trip flights between the countries will be allowed to be conducted by each country’s carriers. Each country will be able to operate up to 20 daily roundtrip flights between the United States and Havana, and up to 10 daily roundtrip flights between the United States and each of nine other destinations in Cuba.

Immediately upon the announcement of the agreement, the DOT invited US carriers to apply for allocation of the new flight opportunities.[3] Applications from the US carriers are due to the DOT by March 2. The DOT is to answer those applications by March 14 and carrier replies are due March 21. The scheduled services are expected to begin in the fall 2016. All US carriers to which frequencies are eventually allocated will still be required to comply with all applicable regulations and requirements of the DOT and other US agencies and all US laws. US carriers’ ability to provide US–Cuba service through licensed charter flights continues unchanged.

Department of Transportation Matters Regarding Blocked Space, Code-Sharing and Wet-Leasing

The new amendments announced on January 27 allow blocked space, code-sharing or wet-leasing arrangements. As is the case with such arrangements with foreign carriers in general, any proposed blocked space, code-sharing or wet-leasing arrangement between a US air carrier and a Cuban carrier will require the DOT’s advance authorization. The DOT must determine whether the proposed operations are in the public interest, by assessing whether such operations meet an acceptable level of safety and security, and whether they will adversely impact competition in the US airline industry.

A US carrier seeking to conduct the activities allowed pursuant to the most recent OFAC amendments must first apply to the DOT for specific authorization for such planned operations.[4] The DOT will grant authorization only if the foreign carrier is from a country that complies with the safety standards of the US Federal Aviation Administration’s (FAA) International Aviation Safety Assessment (IASA) program and the proposed foreign carrier partner meets the requisite safety standards.[5] As part of the DOT’s analysis, the FAA will assess the safety oversight functions of the national aviation authority having jurisdiction over the proposed foreign partner’s operations.

Based on publicly available information, to date, the safety oversight function of Cuba’s national aviation authority has not been assessed by the FAA.[6] In assessing the safety oversight provided by any country’s civil aviation authority, the FAA will determine whether such oversight meets the minimum international safety standards established by the International Civil Aviation Organization (ICAO). Cuba is an ICAO member state and, according to the currently available ICAO information, in regard to the ICAO Universal Safety Oversight Audit Programme (USOAP), was audited by ICAO between February 19, 2008 and February 28, 2008, and meets the ICAO minimum safety standards. If the FAA determines that Cuba’s USOAP rating satisfies the requirements of the IASA program, it should approve the first prong of the safety assessment of the proposed code-sharing arrangement.

With respect to the proposed foreign carrier, the US carrier seeking authorization for such operations must have an existing FAA-accepted code-share safety program and must conduct safety audits on the proposed foreign partner in accordance with that program. The FAA will review the US carrier’s safety audit program, its initial safety audit report on the foreign carrier, and its statement that the foreign carrier is in compliance with international safety standards. Additionally, after authorization is granted, the US carrier must monitor its foreign partner’s safety programs for continued compliance during the existence of the approved arrangement. The DOT authorization process also includes review of the terms of the parties’ agreement for the proposed operations.

As for arrangements with foreign carriers that will provide service directly to the United States or to US territories, the Transportation Security Administration will provide the DOT with information regarding the security of the foreign carrier and its home country to aid the DOT in its assessment.

In assessing the impact of a proposed arrangement on competitiveness, the DOT will determine whether the agreements are adverse to the public interest because they would substantially reduce or eliminate competition.[7] In addition to serving the application for authorization on the requisite US government agencies, the US carrier seeking such authorization also must serve the application on each US-certificated carrier authorized to serve the general area in which the proposed transportation is to be performed. These other carriers may file any comments for consideration by the DOT.[8]

Of course, since most of the restrictions under the embargo remain in effect, operations under any such code-sharing, blocked space or wet-leasing arrangement, even if authorized by the DOT, may only be conducted within the scope of authorized US–Cuba transactions noted above.

Conclusion

The actions by BIS and OFAC and the announcements by the DOT will allow for a further expansion of trade activity and facilitate opportunities between the United States and Cuba. However, OFAC and BIS have made clear that they intend to continue enforcing existing sanctions on and trade embargoes with Cuba. Many restrictions will remain in place until US legislators vote to end or modify the embargo against Cuba. For example, the saleor lease by US persons of aircraft or related services to Cuba without a license continues to be restricted. Furthermore, as it stands now, any aircraft owned by the Cuban government arriving in the United States is subject to immediate seizure in settlement of the billions of dollars in judgments reached in US courts against Cuba in connection with Cuba’s nationalization of property owned by Americans and other civil judgments against the Cuban government. Thus, we remind those looking to take advantage of opportunities to sell or lease aircraft or related services to review all licensing applications and potential transactions with Cuba carefully to ensure that they are in compliance with federal laws and regulations.

[1] See Cuba Licensing Policy Revisions, 81 Fed. Reg. 4,580 (Dep’t Commerce, Jan. 27, 2016); Cuban Assets Control Regulations, 81 Fed. Reg. 4,583 (Dep’t Treasury, Jan. 27, 2016).

[2] OFAC now allows for financing and payment of authorized transactions through US banks or through sales on an open account. These changes were made to address the inability of customers in Cuba to obtain financing or for authorized transactions with the United States, due to more restrictive payment and financing arrangements.

[3] See, Order Instituting Proceeding and Inviting Applications, 2016 U.S. – Cuba Frequency Allocation Proceeding, issued by the US Department of Transportation, Docket DOT-OST-2016-0021, February 16, 2016.  

[4] The foreign carrier also must comply with all other relevant regulations, and hold all requisite DOT authorizations, prior to conducting any of the newly-allowed operations.

[5] See Department of Transportation Office of the Secretary and Federal Aviation Administration Code-Share Safety Program Guidelines, 12/21/2006, Revision 1.

[6] As Cuban carriers have not provided service to the US or participated in code-sharing arrangements with US carriers, and the Cuban national aviation authority has not significantly interacted with the FAA, for a four-year period, Cuba is not included on the publicly available IASA program summary listing, in accordance with standard FAA procedures. Before Cuba can be rated in the IASA program, a full reassessment of its aviation safety oversight must be conducted by the FAA.

[7] 49 U.S.C. 41309(b). Further, in accordance with 49 U.S.C. 41308(b), if it is determined that competition would not be reduced or eliminated, the DOT must approve the proposed agreement. If it is determined that competition would be adversely affected, but the DOT finds that (1) the arrangement is nevertheless necessary to meet a serious transportation need or to achieve important public benefits, including US foreign policy goals, and (2) those public benefits cannot be met or achieved by reasonably available and materially less anticompetitive alternatives, the DOT must approve the agreement.

[8] The DOT, the FAA, the Department of Defense, the Anti-trust division of the Department of Justice and any other US agency the DOT deems necessary must be served, in addition to the other carriers. 14 C.F.R. 212.10(d)(6). See also, Code-Share Safety Program Guidelines, infra at n. 5.

Article By Jane M. Cavanaugh, Stewart B. Herman & Timothy J. Lynes of Katten Muchin Rosenman LLP

©2016 Katten Muchin Rosenman LLP

EU Policy Update – February 2016 re: Dutch Presidency and Brexit, Digital Single Market Policy, Energy and Environment

Dutch Presidency and Brexit

In January, the Netherlands took over the Presidency of the Council of the European Union from Luxembourg.  In line with the political intentions of the Juncker Commission to be ‘big on the big issues but small on the small issues’, the Netherlands promises to focus on the essentials during its Presidency.  In particular, the Dutch Presidency would like to focus on migration and international security.  Another priority is to strengthen the free movement of services and the free movement of workers, where the Presidency would like to strengthen the protection of workers posted abroad.

Additionally, on February 2, the President of the European Council, Donald Tusk, presented his proposals for a ‘new settlement of the United Kingdom within the European Union’.  If accepted, they would allow David Cameron to campaign in the ‘Brexit’ referendum on the continuing membership of the UK in the bloc.  The Heads of State and Government will discuss and adopt the text in a meeting on February 18.  For Covington’s analysis of the proposals presented and the referendum, please see here.

Digital Single Market Policy

The formal adoption of the EU Network and Information Security (NIS) Directive is a step closer following a vote on January 14 by the European Parliament’s internal market and consumer protection (IMCO) committee.  The committee confirmed that the minimum harmonisation requirements under the Directive do not apply to digital service providers.  This means that Member States will not be able to impose any further security or notification requirements on digital service providers beyond those contained in the Directive, when transposing it into national law.  The NIS Directive will now be put forward for a plenary vote in the European Parliament.  Once it is published in the Official Journal of the European Union and enters into force later this year, Member States will have 21 months to transpose it into national law.  Member States will then have a further 6 months to apply criteria laid down in the Directive to identify specific operators of essential services covered by national rules.  These processes are likely to be complicated, and companies that may fall within scope should participate in consultations and monitor developments across the EU over the coming months.

On January 19, the European Parliament adopted a resolution on the Digital Single Market Strategy of the European Commission.  The parliamentarians called for ambitious and targeted actions to complete Europe’s digital single market.  Among other things, the MEPs support the end of geo-blocking practices across Europe, the setting of a single set of contract rules and consumer rights for online sales and for digital content, and the modernization of the copyright framework.

On February 2, the European Commission and U.S. Government reached a political agreement on the new framework for transatlantic data flows.  The new framework – the EU-U.S. Privacy Shield – succeeds the EU-U.S. Safe Harbor framework. The EU’s College of Commissioners has also mandated Vice-President Ansip, in charge of the Digital Single Market, and Commissioner Jourová, Commissioner for Justice, Consumers and Gender Equality, to prepare the necessary steps to put in place the new arrangement.  For Covington’s full analysis of the announcement of the EU-U.S. Privacy Shield, please see here.

Energy and Environment Policy

The European Commission published a proposal to update the approval requirements and market surveillance of new passenger cars and their respective systems and components.  The Commission’s proposal aims at strengthening the credibility and enforcement of the applicable safety and environmental requirements for cars, following the controversy regarding Volkswagen last year.

In a significant departure from past EU legislation, the proposal would empower the Commission to impose administrative fines on economic operators who are found not to have complied with the approval requirements, of up to €30,000 per non-compliant vehicle.

The Commission’s proposal focuses on three elements.  First, the European Commission proposes to reinforce the credibility of the type-approval assessment of new vehicles by ensuring that the technical services testing the new vehicles are fully independent from car manufacturers.  For this purpose, the proposal would enhance the financial independence of such technical services and require Member States to create a national fee structure to cover the costs of type-approval testing and market surveillance activities for vehicles.  Moreover, in order to prevent the use of ‘defeat devices’, as in the Volkswagen controversy, the proposal would grant approval authorities and technical services access to the software and algorithms of the vehicles tested.

Second, the proposal includes measures to strengthen the market surveillance of vehicles after they are type-approved and in circulation.  Member State authorities and the Commission would be able to conduct tests and inspections on cars available on the market and would be empowered to adopt restrictive measures in case of non-compliance of vehicles.  Among other proposed measures, the Commission would establish and chair a forum to coordinate the network of national authorities responsible for type-approval and market surveillance.  Member States would also be able to inspect and take measures against vehicles type-approved in a different EU Member State.

Third, the Commission proposes measures to ensure that non-compliant manufacturers are penalized in case of non-compliance.  Member States would be required to adopt penalties for non-compliant economic operators, including car manufacturers, importers and distributors, as well as technical services.  This may be complemented by administrative fines, imposed by the Commission, of up to €30,000 per non-compliant vehicle, as referred to above.

Finally, the European Commission hopes to ensure a more uniform application of the legislation in the EU by proposing a Regulation as opposed to the current Framework Directive 2007/46/EC.  If adopted, the Regulation would be directly applicable in national law with no requirement of transposition.

The Commission proposal is available here; it has been sent to the Council and European Parliament for consideration.

The European Commission is expected to propose a revision of the Fertilizers Regulation (EC) 2003/2003 in March 2016.  This revision comes in parallel to the Circular Economy Package announced in December 2015, which aims to create a single market for the reuse of materials and resources.

Under the current EU Regulation 2003/2003, manufacturers and importers of fertilizers may choose to comply with the laws of the Member States where they market their products, or to get their products approved and CE-labeled under the Regulation.  However, Regulation 2003/2003 only regulates a limited number of categories of fertilizer products.

According to Commission officials, the proposal aims to create a level playing field between existing, mostly inorganic categories of fertilizers, and innovative fertilizers, which often contain nutrients or organic matter recovered and recycled from biowaste or other secondary raw materials.  Therefore, the proposal will make the approval process more flexible for new categories of CE-labeled fertilizers.

The draft legislative text is structured in four parts: (i) a list of materials that could be used for the production of CE-marketed fertilizing products under the conditions included in the annexes of the proposal; (ii) a list of product function categories for fertilizers, rules for blends of different product categories, and respective safety and quality requirements for each category included in the annexes; (iii) an annex with the labelling requirements by product function; and (iv) a section with the different conformity assessment procedures.  Fertilizers that follow the harmonized EN standards will be presumed to conform with the requirements of the regulation.

Moreover, the proposal would continue to allow Member States to regulate national fertilizing products.  Products that are not in compliance with the EU Fertilizers Regulation and do not carry the CE label would be able to marketed in a particular Member State if they comply with its national legislation.

Importantly, the revised Fertilizers Regulation is also likely to include an EU-wide limit on the presence of cadmium in fertilizers.  In November 2015, the Scientific Committee on Health and Environmental Risks published an opinion concluding that new scientific information available justifies an update of the 2002 opinion on Member State Assessments of Risk to health and the Environment from Cadmium – see here.

The draft proposal is currently in inter-service consultation among the different Directorates General of the European Commission.  Fertilizer manufacturers wishing to voice their opinion regarding the future Regulation on fertilizers should reach out now to the different services of the Commission.

Internal Market and Financial Services Policies

On January 15, the European Commission launched a public consultation on non-binding guidance for reporting non-financial information by certain large companies, following Article 2 of Directive 2014/95/EU – see here.  Directive 2014/95/EU aims at improving the transparency of certain large companies related to Environmental matters, social and employee matters, human rights, and anticorruption and bribery matters.  The feedback gathered during the consultation will be used to prepare the guidelines and facilitate the disclosure of non-financial information by undertakings.  The public consultation will run until April 15, 2016.

On January 28, the European Commission presented its so-called Anti-tax Avoidance Package – see here.  The initiative includes: (i) a new communication on tax avoidance in the EU; (ii) a proposal for an Anti-Tax Avoidance Directive; (iii) a proposal for a Directive implementing the G20/OECD Country by Country Reporting (CbC Reporting); (iv) a Recommendation to the Member States on Tax Treaties, and (v) a Communication on an External Strategy regarding tax avoidance.

The Anti-Tax Avoidance Directive includes six measures, which aim at limiting the abuse of six well-established practices used to avoid taxes in various jurisdictions in Europe.  These include the mismatch in legal characterisation of financial instruments or legal entities between Member States, excessive inter-group interest charges, and a general anti-abuse rule against arrangements the essential purpose of which is to obtain a tax advantage.

The legislative proposal on CbC Reporting aims to strengthen the existing mandatory and automatic exchange of information between the Member States in the field of taxation.  The proposal also requires the parent entity of a multinational group to report to the competent authorities the aggregated information on the revenue, profit (or loss) before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash equivalents, in respect of each jurisdiction in which the group operates.

Finally, because tax avoidance has a strong global dimension, the EU will also cooperate better with third countries on tax issues. The Commission therefore proposes to adopt a common EU system to screen, list and put pressure on third countries that refuse to adopt policies to limit tax avoidance. In addition, before the end of 2016, the Commission and Member States will consider whether to put in place sanctions to incentivize third countries to improve their tax systems.

Life Sciences and Healthcare Policies

At the beginning of February 2016, the Dutch presidency will resume trilogues on the legislative proposals regarding the medical devices Regulation (“MD proposal”) and the in vitro diagnostic medical devices Regulation  (“IVD proposal”).  The European Commission presented this pair of proposals in September 2012, and recently called upon the Council of Ministers and the European Parliament to reach an agreement in the first half of 2016.  The Dutch delegation therefore intends to ramp up the number of trilogues between the institutions to five political meetings and 10 to 15 technical meetings during its presidency.  Nonetheless, important differences remain between the negotiators on the reprocessing of single use devices, liability insurance for manufactures, and the classification of devices in the framework of the IVD proposal.  It is understood that the Dutch presidency hopes to achieve an agreement by the Employment, Social Policy, Health and Consumer Affairs Council of June 17, 2016.

Trade Policy and Sanctions

On January 1, the Deep and Comprehensive Free Trade Area (“DCFTA”) between the EU and Ukraine became operational.  According to the Commission, the implementation of the DCFTA will improve the Gross Domestic Product of Ukraine by circa 6% and increase economic welfare for Ukrainians by 12% over the medium term.

On January 13, the European Commission held an initial orientation debate on Market Economy Status for China in anti-dumping proceedings.  Under the current WTO rules, the EU can calculate potential anti-dumping duties on the basis of data from another market economy country rather than the domestic prices used in China, because there is a presumption that market economy conditions do not prevail in China.  However, this provision, included under Article 15(a)(ii) of China’s Protocol of Accession to the WTO, will expire on December 12, 2016.  The Commission is therefore considering its options for changing the methods used to calculate dumping margins in respect of China.  It is important for the Commission to start the process on time, because any change in the anti-dumping rules are likely to require legislation to be adopted by the Council and the European Parliament.  Given the delicate nature of such negotiations, the process is expected to take a year.

January 16, 2016, saw the Implementation Day of the Joint Comprehensive Plan of Action (“JCPOA”) – the historic deal reached among China, France, Germany, Russia, the UK, the U.S., the EU and Iran to ensure the exclusively peaceful nature of Iran’s nuclear program.  As part of that agreement, the Council of the EU lifted all nuclear-related economic and financial EU sanctions on Iran.  It did so by bringing into force the EU legislative package adopted on October 18, 2015, following the verification by the International Atomic Energy Agency (“IAEA”) that Iran had complied with the requirements laid down in the JCPOA.  As of January 16, many sectors and activities have been reactivated, including, among others: financial, banking and insurance measures; oil, gas and petrochemical; shipping and transport; gold and other metals; software; and the un-freezing of the assets of certain persons and entities.  Note that proliferation-related sanctions, including arms and missile technology sanctions, will remain in place until 2023 (subject to various conditions).  For the Council press release, see here.  For more details, see the Council Information Note here.

Article By Sebastian F.A. Vos of Covington & Burling LLP
© 2016 Covington & Burling LLP

Cuba: Further Easing of the U.S. Sanctions

Following up on the historic changes in 2014 and 2015 to the five-decade U.S. trade embargo on Cuba, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Commerce’s Bureau of Industry and Security (BIS) have announced new amendments to the Cuban Assets Control Regulations (CACR) and Export Administration Regulations (EAR), effective January 27, 2016.

What U.S. Companies Need to Know About the Easing of Restrictions

  1. Payment Terms for Authorized Exports to Cuba No Longer Restricted
    OFAC restrictions have been lifted on payment and financing terms for authorized exports and reexports to Cuba, except for agricultural commodities and items. U.S. banks will be authorized to provide financing by third-country or U.S. financial institutions (e.g., letters of credit, payment of cash in advance, sales on an open account). Payment for agricultural exports will still be limited to cash in advance or financing by third-country banks only. “Authorized exports and reexports” include those authorized under a BIS license exception (e.g., products and materials exported to private sector entrepreneurs under License Exception “SCP” – Support for the Cuban People), as well as export transactions permitted by BIS under a specific license.

  2. Most Cuban Embargo Restrictions Remain in Place
    Although the amendments to the CACR and EAR signify further relaxing of Cuba sanctions, the U.S. embargo on Cuba remains largely in place; most transactions between the U.S. and Cuba continue to be prohibited.

    In addition, a general policy of denial will still apply to exports and reexports of items for use by state-owned enterprises, agencies, or other organizations of the Cuban government that primarily generate revenue for the state. Additionally, applications to export or reexport items destined to the Cuban military, police, intelligence and security services remain subject to a general policy of denial.

  3. More Favorable Licensing Policies for Certain Exports and Reexports
    The following transactions still require a license application, but the chances of approval for such licenses have improved:

Exports to Cuban Government Agencies Meeting the Needs of the People: BIS is now considering, on a “case-by-case” basis, license applications for exports and reexports to Cuban state-owned enterprises and government agencies that provide services and goods to meet the needs of the Cuban people. Previously, such license applications were subject to a policy of denial. The new case-by-case policy applies to items for construction of facilities for public water treatment, electricity or other energy; sports and recreation; agricultural production; food processing; disaster preparedness, relief and response; public health and sanitation; residential construction and renovation; public transportation; wholesale and retail distribution for domestic consumption by the Cuban people; and artistic endeavors.

  • New Policy of Approval for Certain Exports and Reexports: License applications for the following exports and reexports are now subject to a “general policy of approval,” an upgrade from “case-by-case” consideration:

  • Environmental protection items: U.S. and international air quality, water, or coastline

  • Telecommunications items: To improve communications to, from, and among the Cuban people.

  • Civil aviation and commercial aircraft safety items: Those necessary to ensure the safety of civil aviation and safe operation of commercial aircraft engaged in international air transportation, including the export or reexport of civil aircraft leased to state-owned enterprises.

  • Agricultural items: Such as insecticides, pesticides, and herbicides, as well as other agricultural commodities (e.g., tractors and other farm equipment) not eligible for License Exception AGR

  • Commodities and software: To human rights organizations or to individuals and non-governmental organizations that promote independent activity intended to strengthen civil society in Cuba; also to U.S. news bureaus in Cuba whose primary purpose is the gathering and dissemination of news to the general public.

4. Travel Authorized for Additional Purposes Including Film Making 
U.S. persons are still prohibited from traveling to Cuba for tourism, but OFAC now permits travel to Cuba for additional purposes as highlighted below.

  • Travel related to information and informational materials now includes travel for the filming of movies and TV programs, music recordings, and artwork creation.

  • Organization of professional meetings, public performances, clinics, workshops, and athletic and other competitions and exhibitions in Cuba, in addition to the previously authorized attendance at such events.

5. Air Carrier Services Expanded to Permit Code-Sharing and Leasing
U.S. companies can now enter into blocked space, code-sharing, and leasing arrangements to facilitate the provision of carrier services by air, in connection with travel or transportation between the U.S. and Cuba, including such arrangements with a Cuban national.

Article By Global Services of Barnes & Thornburg LLP

© 2016 BARNES & THORNBURG LLP

White House Announces Long-Awaited Trans-Pacific Partnership Agreement

The Obama administration released the full text of the Trans-Pacific Partnership (TPP) agreement, on November 5, kicking off a 90-day window for congressional review.

The TPP would arguably be the largest free trade agreement in history when considering the economies of the 12 Pacific Rim member countries, covering approximately 40% of the global economy. The agreement must now be individually approved by each of the 12 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.

If ratified, the TPP will be one of President Obama’s crowning achievements. Obama has championed the landmark agreement as a vehicle for opening new markets to American products and establishing higher labor and environmental standards, while building an economic bloc in the Asia-Pacific region to compete with China. (See the White House Fact Sheet here.)

Obama now has an uphill climb as he launches a major public relations campaign to sell the agreement to the American public. The debate will be contentious, with a bitterly divided Congress voting on the final agreement in early 2016 – well into the election year as presidential primary elections are taking place.

Under pressure from labor unions to oppose the deal, Democrats have largely withheld support. In early October, former Secretary of State, and current presidential candidate, Hillary Clinton came out against the deal which she once called the “gold standard” of trade agreements. Last spring, Obama relied on Republicans in Congress to pass the underlying fast-track trade authority bill, with only 28 Democrats in the House voting in favor of passage. Under fast-track authority, Congress can approve or reject the agreement, but not amend it.

Note: The Office of the United States Trade Representative (USTR) posted the agreement in roughly two hundred separate PDF documents. The Washington Post promptly published a search function on their website for easier searching.

Article By Michelle A. Leeds of Foley & Lardner LLP

© 2015 Foley & Lardner LLP

Amazon Wins Ruling on Results for Searches on Brands It Doesn’t Sell

On October 21, 2015, the Ninth Circuit ruled that online retailer Amazon does not violate the Lanham Act when, in response to a search for a brand it doesn’t sell, it returns a results page that fails to disclose that fact and simply offers competing products sold under different brands. The decision in MultiTime Machine, Inc. v. Amazon.com, Inc. weakens the “initial interest confusion” doctrine in the Ninth Circuit and will likely be perceived as a significant victory for online retailers.

Plaintiff MultiTime Machine (MTM) sells an expensive military-style watch known as the “MTM Special Ops,” but doesn’t sell it through Amazon. When an Amazon customer types “mtm special ops” into the Amazon search box, the result is a list of other brands of military-style watches that Amazon sells. Meanwhile, “MTM Special Ops” remains visible within the search box and also in smaller type at the top of the page. Nothing on the page indicates that Amazon does not sell MTM products. MTM sued Amazon for trademark infringement, claiming that Amazon’s use of its trademark in this way created a likelihood of confusion.

The district court dismissed the case on summary judgment. MTM appealed. In a 2-1 decision issued July 6, 2015, the Ninth Circuit remanded the case, holding that there were issues of fact as to consumer confusion that precluded summary judgment. MTM then petitioned for a rehearing en banc.

On Wednesday, while that petition was pending, the same panel reversed itself and held in a 2-1 decision that “no rational trier of fact could find that a reasonably prudent consumer accustomed to shopping online would likely be confused by the Amazon search results.” Summary judgment in favor of Amazon was affirmed.

Judge Silverman (the dissenter in the July opinion, now writing for the majority) wrote that Amazon is doing no more that “responding to a customer’s inquiry about a brand it does not carry by … stating clearly (and showing pictures of) what brands it does carry.” In the majority’s view, this is “not unlike when someone walks into a diner, asks for a Coke, and is told ‘No Coke, Pepsi’.”

The Court held that the Ninth Circuit’s traditional eight-factor Sleekcraft test for assessing likelihood of confusion is not appropriate for this case. Sleekcraft is designed for cases analyzing similarity of the marks of competing brands. Here, said the Court, there is no issue as to the other marks involved; the only issue is Amazon’s use of MTM’s mark in displaying search results. In cases involving trademarks in the Internet search context, the more appropriate test is “(1) Who is the relevant reasonable consumer; and (2) What would he reasonably believe based on what he saw on the screen?”

Adopting the standard set forth in Toyota Motor Sales, U.S.A. Inc. v. Tabari, 610 F.3d 1171 (9th Cir. 2010), the Court held that the relevant consumer here is a “reasonably prudent consumer shopping online … Unreasonable, imprudent and inexperienced web-shoppers are not relevant.” The Court also noted that the watches at issue are relatively expensive and that consumers are therefore likely to be even more vigilant than usual.

As for what is seen on the screen, the Court focused on the “clear labeling” of all of the competing products returned in the search. MTM argued that “initial interest confusion” might occur because the phrase “mtm special ops” appears three times at the top of the search results page. It also argued that Amazon should change its results page to explain to consumers that it does not offer MTM watches. The Court brushed off both contentions. “The search results page makes clear to anyone who can read English that Amazon carries only the brands that are clearly and explicitly listed on the web page.”

As a result, in the Court’s view, no jury trial is necessary because there are no material issues of disputed fact. The contents of the web page showing “clear labeling,” and the expensive price of the watches, is undisputed. The Court needs no more to conclude that “no reasonably prudent consumer accustomed to shopping online” could be deceived, even initially.

Judge Bea, who had written the majority opinion in the July decision, wrote a sharp dissent. In his view, a jury is entitled to decide whether shoppers would believe that there is a relationship between MTM and the products listed in the Amazon search results. MTM had argued that this could arise from a belief that MTM had acquired those brands, or because they are other brands from the same parent company (much as Honda and Acura automobiles come from the same company). Determining whether or not MTM is correct, said Judge Bea, is a question for a jury, not appellate judges. This is especially true in a case involving brands whose relationships to each other may not be so obvious to consumers – unlike the relationship between Coke and Pepsi.

Judge Bea claims that, by “usurping the jury function,” the majority effectively overrules the “initial interest confusion” basis for infringement. In his view, the question of whether the defendant’s labeling is clear enough to prevent customers from initially believing that the products are connected with those of plaintiff is a fact-intensive inquiry, and prior Ninth Circuit cases have not applied the doctrine as a matter of law, as the Court does here.

Apart from the technical legal issues, the two opinions reflect differing views of how the public interacts with online commerce. The majority appears to believe that online buying is now so common that consumers are conditioned to understand that entering a trademark as a search term will not necessarily return results pointing only to that brand. Its apparent desire to create a bright-line rule on “clear labeling” may make it easier for e-retailers to move to dismiss, without a trial, infringement claims from brand owners concerned about use of their marks to search for competing products. The dissent is more skeptical about consumer sophistication; its approach would create a greater burden on online retailers to defend against infringement claims.

It is unclear whether the majority intends its holding to be applied only in cases where, as here, the goods are relatively expensive and the brands are not well known. Given this uncertainty, the fact that it was a split decision, the prior petition for rehearing en banc, and the participation by multiple amici curiae, it is possible that there will be an en banc rehearing in this case. If the decision stands, however, it may diminish the doctrine of “initial interest confusion” in the Ninth Circuit and allow a freer hand to online retailers in using trademarks to generate searches for broad classes of competitive products.

Article By Andrew Baum of Foley & Lardner LLP

© 2015 Foley & Lardner LLP