Tag: Trade

Too Good To Be True: FTC’s Crackdown On L’Occitane’s Body Slimming Almond Extracts

Sheppard Mullin Law Firm

L’Occitane Inc’s advertisements for its topically-applied body sculpting almond extracts seemed straightforward: “Almond Shaping Delight 3 out of 4 women saw firmer, lifted skin. This luxuriously lightweight massage gel instantly melts into the skin to help visibly refine and sculpt the silhouette” and “Almond Beautiful Shape Trim 1.3 inches in just 4 weeks. This ultra-fresh gel cream helps to visibly reduce the appearance of cellulite, while smoothing and firming the skin.”

Unfortunately for L’Occitane, an international skin care company with over 150 shops across the U.S., the Federal Trade Commission (FTC) found those claims dubious at best, and earlier this year charged the company with violating the Federal Trade Commission Act (“FTC Act”).

According to the FTC’s complaint, which was filed on January 7, 2014, L’Occitane had been manufacturing, advertising, and selling the two products at issue, “Almond Beautiful Shape” and “Almond Shaping Delight,” in interstate commerce and violated the FTC Act by promoting them as being able to slim and reshape the body. The FTC alleged that L’Occitane did not have sufficient scientific data to support L’Occitane’s advertising claims that the creams could trim the user’s thighs, reduce cellulite, and slim the body in just weeks. The FTC asserted that  L’Occitane based its advertising claims in large part on two unblinded and non-controlled clinical trials and greatly exaggerated the results from one of the studies. The FTC charged L’Occitane with violating Sections 5(a) and 12 of the FTC Act, which declare unfair or deceptive acts or practices unlawful and bar false advertisements likely to induce the purchase of food, drugs, devices, or cosmetics. As part of the final consent order, the FTC fined L’Occitane $450,000 and prohibited it from making future false and deceptive weight-loss claims.

L’Occitane, however, is not the only entity which the FTC has recently fined because of questionable advertising claims. The FTC has also charged Sensa Products, LeanSpa, and HCG Diet Direct with violations of the FTC Act for allegedly misleading the public with unfounded weight loss claims and misleading endorsements relating to their products. These complaints, along with L’Occitane’s, were part of the FTC’s recent “Operation Failed Resolution” initiative, aimed at combating deceptive weight-loss claims.

One of the companies charged, Sensa Products, which claimed weight loss results from one of its dietary supplements, had to pay a $26 million fine for FTC Act violations. As a part of “Operation Failed Resolution,” the FTC also released an updated media guide for spotting deceptive weight-loss claims in advertising, entitled “Gut Check: A Reference Guide for Media on Spotting False Weight-Loss Claims.”

Manufactures and marketers of health products, cosmetics, drugs, and dietary supplements should be mindful of the FTC’s continuing and increasing vigilance in taking action with respect to enforcement of the FTC Act to stop unfounded weight loss claims. Companies making weight-loss claims in advertising and marketing materials must make sure that their claims are defensible and supported by sufficient credible scientific data.

Jordan Grushkin contributed to this article.

Article By:

Theodore C. Max
Of:
Sheppard, Mullin, Richter & Hampton LLP

US Customs and Border Patrol (CBP) Announces Trusted Trader Program Test

DrinkerBiddle

U.S. Customs and Border Protection (“CBP”) announced today the commencement of its long-anticipated Trusted Trader Program test which will run for 18 months in collaboration with the U.S. Consumer Product Safety Commission (“CPSC”) and theU.S. Food and Drug Administration (“FDA”). In effect, the Trusted Trader Program will combine the current Customs-Trade Partnership Against Terrorism (“C-TPAT”) and Importer Self-Assessment (“ISA”) program with the objective of streamlining the process through which importers can establish that they strive to secure their supply chains and strengthen their internal controls for compliance with the laws and regulations administered or enforced by CBP, including those of other government agencies.

Currently, importing companies can participate in C-TPAT, which focuses on securing supply chains, and ISA, which focuses on strengthening internal controls to comply with Customs laws and regulations in exchange for special benefits. If a company wants to participate in ISA, that company must also be in C-TPAT. By combining the two programs, the Trusted Trader Program will move toward a whole-government approach to supply chain security and trade compliance thereby strengthening government collaboration among different government agencies – CBP, the FDA, and the CPSC. It will also align with the Authorized Economic Operator (“AEO”) programs around the world, which focus on a combined security and compliance model.

Benefits of Participation

To encourage participation in this dual model, CBP is offering the following additional benefits to those currently offered to C-TPAT and ISA members:

  • A reduced FDA targeting/examination risk score;
  • A penalty offset, upon request, as part of a CBP penalty mitigation decision;
  • For Reconciliation program participants, an ability to flag and unflag entries retroactively after the entry summary is filed up until 60 days prior to the date of liquidation;
  • A reduction in Foreign Trade Zone on-site inspections;
  • An exemption from on-site visits from Drawback Specialists, for drawback claimants;
  • A limit of one full desk review per year for drawback claimants;
  • An exemption from random Non-Intrusive Inspections (although the right is reserved to conduct the inspections as appropriate for operational reasons);
  • A quarterly submission of the CAS number, the use, and the description for the chemical compound in advance of the calendar year quarter;
  • A promise from CBP to process Post-Entry Amendments on unliquidated entries within a 90-day timeframe;
  • A choice of exam location when CBP selects an entry for examination;
  • When a single entry contains multiple containers, but only one container is selected for examination, the remaining articles will be released; and
  • Additional incentives for the companies that complete the Product Safety portion of the Trusted Trader application.

Application Process

Importing companies that are interested in participating in the Trusted Trader Program test and meet the eligibility criteria must submit an email; if they are provisionally selected they will be given the Trusted Trader application. CBP will begin accepting emails on Monday June 16, 2014, and plans to begin selecting the initial test participants no later than July 16, 2014. CBP plans to limit the Trusted Trader program test to fewer than 10 participants. Specifically, CBP is looking for test participants to include at least one importer currently participating in C-TPAT, one importer not currently participating in any CBP partnership programs, and one or two participants monitored by CPSC and FDA.

To be eligible to apply for the Trusted Trader Program test, a company must be an active U.S. or Non-Resident Canadian importer with an Importer of Record or CBP-assigned number and at least two years of importing history. The company must also have written policies and procedures pertaining to its import process, a business office staffed in the United States or Canada, and a valid continuous importation bond filed with CBP. A company must also conduct an assessment of its supply chain based on C-TPAT’s security criteria for importers, implement and maintain security measures and supply chain security practices meeting C-TPAT’s security criteria, have a designated company officer responsible for C-TPAT, and create and provide a C-TPAT security profile. Finally, it must maintain books and records to establish compliance with U.S. Customs laws and regulations.

Through the Trusted Trader Program, CBP will: achieve integrated U.S. government collaborations that will result in enhanced efficiencies leading to a reduction in government-wide resource expenditures; expand information sharing between government agencies; reduce administrative costs by streamlining the application and validation processes; and increase efficiencies in the existing trade programs. Just as CBP has done with C-TPAT, ISA, and the Centers of Excellence and Expertise, the Trusted Trader program should strengthen security, identify low-risk trade entities, and increase overall efficiency of trade by segmenting risk and processing by account.

Article By:

Kathleen M. Murphy
Beata K. Spuhler
Mollie D. Sitkowski
Of:
Drinker Biddle & Reath LLP

New G-7 Sanctions Against Russia

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The United States, in coordination with other G-7 nations, announced on Monday, April 28new sanctions on individuals and entities with ties to the Russian government and President Putin.  The newly announced sanctions build on earlier rounds of U.S. sanctions imposed on March 6, March 17, March 20 and April 11.  The United States also tightened license restrictions for high technology exports to Russia.  In addition to the new U.S. sanctions, the European Union, Canada and Japan also announced new sanctions against Russian individuals and entities.

Reasons cited for the new sanctions were Russia’s failure to abide by commitments it made to de-escalate the crisis during an April 17 meeting in Geneva among Russia, Ukraine, the United States and the European Union (also known as the Geneva accord) and continued Russian-supported efforts to destabilize Eastern Ukraine.  According to an April 25 statement by the G-7 leaders, Russia has failed to take actions required by the Geneva accord and has continued to escalate tensions through its “increasingly concerning rhetoric” and “ongoing threatening military maneuvers on Ukraine’s border.”

New U.S. Sanctions and Export Restrictions

The new U.S. sanctions issued by the Office of Foreign Assets Control of the U.S. Department of the Treasury, target seven individuals and 17 entities, including banks, construction companies and transportation companies, with connections to the Russian government.  These sanctions, like those previously announced, freeze the assets subject to U.S. jurisdiction of all sanctioned individuals and bar those individuals from obtaining visas to enter the United States.  The sanctions also prohibit U.S. persons, including U.S. companies and their overseas branches and divisions, from transacting business with any sanctioned individuals or entities.

In addition, the Bureau of Industry and Security of the U.S. Department of Commerce announced that it added 13 of the newly sanctioned entities to its Entity List (comprised of parties that are prohibited from receiving some or all items subject to the U.S. Export Administration Regulations without a license), and that it will immediately begin denying pending applications for licenses to export or re-export “high technology” items to Russia or Crimea that may enhance Russia’s military capabilities.  Concurrently, the Directorate of Defense Trade Controls of the U.S. Department of State announced that it is placing a hold on all licenses for exports of defense articles and defense services to Russia.

New EU Sanctions

In coordination with the new U.S. sanctions, the new EU sanctions add 15 individuals with ties to the Russian government to the European Union’s existing list of sanctioned individuals.

Other New G-7 Sanctions

The two remaining G-7 member states also imposed new sanctions on Russian individuals this week:  Canada announced sanctions against two Russian banks and nine individuals, and Japan announced visa bans on 23 as-yet-unnamed individuals.

Companies with interests in Russia or Ukraine or doing business with Russian enterprises are advised to ensure appropriate measures are in place to comply with the sanctions, including careful screening of all parties to transactions.

Article By:

Jay L. Eizenstat
Andrea L. Hamilton
David J. Levine
Raymond Paretzky
David Henry
Of:
McDermott Will & Emery

Starving the Bear: The United States Restricts Exports to Russia

Sheppard Mullin 2012

The pressure on Russia continues to build.  As we previously reported here and here, throughout March, the United States and other Western powers implemented a series of sanctions against individuals and entities deemed to be involved in the political destabilization of Ukraine.  Those sanctions were restricted to specific parties, including high ranking Russian and Ukrainian officials and – notably – one Russian bank.

The United States has now gone further, implementing restrictions that restrict trade with the entire country of Russia.  These sanctions are bound to have more bite.

Specifically, on March 26, the U.S. Department of Commerce announced that, since March 1, 2014 and until further notice, it had not and will not issue licenses for exports or re-exports to Russia.  Commerce governs exports and re-exports of U.S.-origin commercial and “dual use” items.  While not all such items require a license for Russia, many sensitive items do.

On March 27, the State Department followed suit: it announced that, until further notice, it will not issue any authorizations for exports of defense articles or services to Russia.  This is essentially an absolute embargo on defense exports to Russia and Russian nationals: an export authorization is required for virtually any export of a defense article, technical data, or defense service to Russia (or any other country).

These two actions constitute a significant expansion of U.S. trade restrictions on Russia, particularly because the license restrictions apply to exports of both goods and technology.  Moreover, the restrictions apply to all Russian individuals and entities, as opposed to the very targeted economic sanctions previously imposed by the Treasury Department.

While the United States has acted quickly, it is not alone, as the European Union has also taken action, introducing targeted sanctions, including an asset freeze and visa ban, against designated parties responsible for human rights violations, violence, and use of excessive force with respect to Ukraine.  In addition, EU Member States have agreed to (i) suspend export licenses on equipment that might be used for internal repression and (ii) reconsider export licenses to Ukraine and Russia related to military technology and equipment.

Collectively, the sanctions imposed to date bring with them a host of practical challenges for companies conducting business in or with Russia.  Western banks may scrutinize transactions with Russian banks and other parties especially carefully in light of the new restrictions.  In some cases, a Western bank might hold up a legitimate transaction for further review if a Russian counterparty is involved.

Companies with current business ties in Russia must, therefore, consider the commercial and related risks of continuing that business.  The United States in particular is implementing sanctions rapidly, piecemeal, and often without much warning.  As the landscape of trade restrictions continues to change, companies must perform ongoing diligence with respect to their Russian business.  For example, companies should perform periodic rescreening of Russian business partners to ensure they do not appear on any U.S. prohibited parties lists.

Article By:

Thaddeus Rogers McBride
Cheryl Palmeri
Of:
Sheppard, Mullin, Richter & Hampton LLP

Bittersweet Ending for Plaintiffs in Chocolate Price-Fixing Litigation

In a February 26, 2014 Memorandum, Chief Judge Christopher C. Conner of the United States District Court for the Middle District of Pennsylvania granted summary judgment for three defendants Mars, Inc., Nestlé USA, Inc., and The Hershey Company in a detailed opinion. The plaintiffs filed suit against chocolate manufacturers nearly six years ago, claiming that they conspired to fix the prices of various chocolate products. The decision is helpful for defendants as precedent that even lock-step price increases are not enough to survive summary judgment in a price-fixing case, at least in a market with few competitors. Judge Conner’s decision also demonstrates for defendants the value of developing and shepherding a comprehensive record to support the argument that their decisions were independent and economically and rationally defensible.

The plaintiffs relied on circumstantial evidence and an inference that parallel price increases were the result of a tacit agreement to engage in collusive behavior, “actuated” by a conspiracy in Canada that resulted in at least one guilty plea by a Canadian chocolate manufacturer. Judge Conner relied in part on a finding that the Canadian conspiracy made a similar conspiracy in the United States more plausible in denying the defendants’ motion to dismiss the complaint. In re Chocolate Confectionary Antitrust Litig., 602 F. Supp. 2d 538 (M.D. Pa. 2009).

Judge Conner found at the summary judgment stage, however, that there was no evidence that executives responsible for pricing in the United States were aware of any anticompetitive activity in Canada, and concluded that the rest of the plaintiffs’ evidence was insufficient to preclude summary judgment for the defendants. The plaintiffs had no direct evidence of conspiracy, so they were required to show both that the defendants consciously raised prices in parallel as well as sufficient evidence of “plus factors.” In this case, the court considered three plus factors: (1) the defendants’ motive and market factors; (2) whether the defendants’ behavior was against their self-interest; and (3) traditional conspiracy evidence. The plaintiffs’ evidence of parallel pricing was the strongest part of their case. The court concluded that Mars, Nestle, and Hershey raised prices in parallel because¾three times over the course of five years¾Mars initiated a price increase, and both Hershey and Nestle followed in quick succession (within one to two weeks) with nearly identical price increases (varying only once, and even then only by two-tenths of a penny).

The court recognized, however, that parallel price increases were not sufficient, especially in a market controlled by a few competitors (or an oligopoly) to support an inference of antitrust liability. The court concluded that the plaintiffs failed to demonstrate that the defendants acted against their own self-interest as required by the second plus factor. In reaching this conclusion, the court first pointed to evidence that the defendants increased prices in anticipation of cost increases, stating “it is rational, competitive, and self-interest motivated behavior to increase prices for the purpose of mitigating the effect of anticipated cost increases.” Judge Conner also cited to what he described as “extensive” internal communications before each increase in which each defendant unilaterally discussed whether they could raise prices as evidence of “independent and fiercely competitive business conduct,” not collusion. Finally, the court agreed with Nestle’s argument that widely supported economic principles supported its decision as the defendant with the smallest market share to follow the price increases of its competitors. In doing so, the court likely rejected an argument¾often made by plaintiffs¾that it was in Nestle’s best interest to cut prices and gain market share.

The court also concluded that the plaintiffs’ traditional evidence of conspiracy was insufficient to satisfy the third plus factor. The plaintiffs relied on three pieces of evidence to satisfy this factor: (1) the Canadian conspiracy; (2) the defendants’ possession of competitors’ pricing information; and (3) the defendants’ opportunity to conspire at trade association meetings. While the court accepted that the Canadian conspiracy could, in theory, facilitate a conspiracy in the United States, it found the facts did not support the application of the theory in this case because there was no evidence that U.S. decision-makers had knowledge of the Canadian conspiracy and there was no tie between the pricing activities in the two countries. From the court’s opinion, it appears the plaintiffs had little traditional conspiracy evidence beyond the supposed connection to Canada. The court rejected an argument that a “handful” of documents suggesting that the defendants were aware of competitors’ price increases before they were made public supported an inference of conspiracy. There was no evidence that the pricing information came from competitors, and the court concluded that this exchange of advance price information was as consistent with independent competitive behavior as it was with collusion. Finally, the court ruled that the presence of company officers at trade meetings¾without any evidence that they discussed prices there¾was insufficient to permit an inference that the price increases were the result of collusive behavior. Reviewing the record as a whole, the court concluded that the plaintiffs had produced no evidence tending to exclude the possibility that the defendants acted independently.

Judge Conner’s opinion is a relatively straightforward application of the standard for ruling on summary judgment in antitrust cases set forth in the Supreme Court’s Matsushita decision and for parallel pricing cases as set forth in the Third Circuit’s Baby Food and Flat Glass opinions. If appealed, Chocolate Confectionary is unlikely to result in a decision changing these standards significantly.

On the bright side for the plaintiffs, they reached a settlement with at least one defendant, Cadbury, before the summary judgment motion was ruled upon, so they will not be left empty handed.

Article by:

of:

Drinker Biddle & Reath LLP

Just the TTIP (Transatlantic Trade and Investment Partnership): A Review of the Transatlantic Partnership Agreement One Year After It Is Introduced to America

Sheppard Mullin 2012

 

Next week will mark one year since President Obama introduced the Transatlantic Trade and Investment Partnership (TTIP) to the nation in his State of the Union Address.  Although the TTIP received only a brief nod in the President’s speech, the TTIP initiative has moved forward at a stunning pace . . . well, a stunning pace for an international trade negotiation, a process that normally crawls along.  As discussed in this blog, the U.S. and European parties to this proposed partnership set an ambitious goal of finalizing an agreement by the end of 2014.  A year into the process, we take a look at the progress to date and the challenges to come.

TTIP Background

We often hear news of trade agreements and other arrangements designed to increase business between the United States and one or more partner countries.

TTIP is different. It’s bigger.

The European Union and the United States comprise the largest and wealthiest market in the world, accounting for over 54% of the world’s GDP and 40% of the world’s purchasing power.  It follows that even the slightest reduction in marketplace barriers on a scale that large could result in sizeable trade increases and economic benefits.  The European Centre for Economic Policy Research estimates that TTIP could boost U.S. exports to the EU by $300 billion annually and add $125 billion to U.S. GDP each year.

Tariffs between the trading partners are already some of the lowest in the global market.  Accordingly, TTIP focuses on reducing non-tariff-barriers (NTBs) to trade between the United States and Europe.  The proposed NTB reductions include aligning domestic standards, cutting costs imposed by bureaucracy and regulations, and liberalizing trade in services and public procurement.

TTIP Negotiations Thus Far

Over the past year, U.S. and EU representatives have met for three rounds of negotiations – the first round was primarily introductory and the other two were more substantive.  The most recent of these negotiation rounds, completed in December, left the U.S. Trade Representative sanguine.  The USTR stated on its website that, “it is a measure of progress that we are firmly in the phase of discussing proposals on core elements of each of the main negotiating areas, as well as beginning to confront and reconcile our differences on many important issues. We have a lot of work to do in 2014, but I am optimistic about what we’ll be able to accomplish in the coming year.”

TTIP in the Coming Year

The next round of TTIP negotiations will be held in Washington, D.C. from March 16 – 20, 2014.  In this fourth round, negotiators expect to work on the wording of provisions designed to ease compliance with existing rules.  Negotiators also expect to draft agreement language to enable U.S. and EU regulators to work together as they draft their respective domestic regulations in the future.  Specific provisions to be addressed in this fourth round will include rules on food safety and animal and plant health, as well as technical regulations, product standards, and testing and certification procedures.  Taken together, these items are often referred to as “Technical Barriers to Trade” (TBTs).

The Chief Negotiator for the EU made clear that, although this set of negotiations will focus on the reduction of TBTs, “TTIP is not and will not be a deregulation agenda.”

This statement exemplifies the numerous conflicts that the negotiators will face in the coming year.  They will have a mandate to harmonize two regulatory systems, reducing the NTBs and TBTs without overly compromising or placing inordinate burdens on either system.  In other words, the negotiators must aim to reduce regulatory barriers without having a deregulation agenda – a tough target to hit.

From that conundrum, potential snares for the negotiating team only multiply.  Interest groups and protectionist factions from both sides of the Atlantic will continue to actively oppose the partnership.  Some Europeans will raise an objection that the deal gives away too much to American business interests.  Further, the voices of labor unions, consumer advocates, environmental groups and other skeptics in opposition to TTIP may grow louder as the parties get closer to a final agreement.  Finally, political sways – a backlash against NSA monitoring of European communications as well as elections in the U.S. and EU in 2014 – may adversely affect the ongoing negotiations.

TTIP proponents remain optimistic, however, confident that a deal can be completed by the end of 2014.  We will keep an eye on developments and report on how nimbly these negotiators can manage the myriad concerns to achieve a useful partnership for the economies on both sides of the Atlantic.

Article by:

Reid Whitten

Of:

Sheppard, Mullin, Richter & Hampton LLP

New Export Control Changes Affect Naval Warfare and Ground Vehicles

Morgan Lewis

 

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

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

The New Rules

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

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

Category VI (Vessels of War and Special Naval Equipment)

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

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

Category VII (Tanks and Military Vehicles)

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

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

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

Definition of “Specially Designed”

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

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

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

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

Implications

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

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

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

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

Marynell DeVaughn also contributed to this article.

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

Article by:

Of:

Morgan, Lewis & Bockius LLP

Update on Government Shutdown's Impact on Trade

Katten Muchin

The ongoing federal government shutdown is impacting a wide variety of import and export trade activities. While the situation remains fluid as each agency executes its contingency plans, below is a summary of the current impact on trade.

Customs and Border Protection (CBP): The majority of CBP employees are exempt from the furlough as being deemed essential to the country’s security. Most of those exemptions are related to the agency’s ongoing revenue collections. Currently, ports are maintaining their normal hours of service. CBP also seems to be accepting and processing protests, although with some delays. However, CBP appears to have stopped processing ruling requests or responding to any court documents due to the shutdown. Among the CBP personnel not exempted from furlough are technicians and program managers. As a result, certain additional CBP activities, such as bonds and licensing and processing FDA refusals, may also be impacted.

Food and Drug Administration (FDA): FDA continues to perform entry review and to address high-risk recalls, civil and criminal investigations, and other critical public health issues. However, FDA has furloughed personnel as well, resulting in entry review delays. The agency is giving priority to perishable entries, defined as merchandise expiring within 30 days, and to any lifesaving medical product. The agency has generally ceased routine establishment inspections, monitoring of imports, notification programs such as those involving food contact substances and import formula, and its laboratory research activities.

International Trade Commission (ITC): ITC has shut down its investigative activities, including antidumping and countervailing injury investigations and reviews, and intellectual property rights infringement investigations and ancillary proceedings. The schedules and deadlines for all investigative and pre-institution activities are being tolled and all hearings and conferences have been postponed. In addition, ITC’s website is down, so information such as the online Harmonized Tariff Schedule is not available.

International Trade Administration (ITA): ITA’s website—including the online steel licensing system—is down. The agency recommends sending an email to steel.license@trade.gov for manual processing of license requests for shipments that do not have a steel license. Enforcement and Compliance (formerly, Import Administration) intends to uniformly toll all administrative deadlines related to the administration of US antidumping and countervailing duty laws for the duration of the shutdown. These include deadlines for preliminary and final determinations in antidumping and countervailing duty investigations and administrative reviews and deadlines for all actions by parties to these proceedings.

Bureau of Industry and Security (BIS): BIS is no longer accepting advisory opinion requests, classification requests (CCATS), encryption reviews, encryption registrations or export license applications. Similarly, BIS will not issue any final determinations. The SNAP-R application on BIS’s website is not available and will not reopen until the shutdown ends. All pending export license applications, commodity classification requests, encryption reviews, encryption registrations and advisory opinion requests will be held without action by BIS until the shutdown ends. Applicants may request emergency processing of export license applications for national security reasons.

Department of Agriculture (USDA): USDA’s website is down. The Animal and Plant Health Inspection Service (APHIS) is operating in the ports, but personnel will not be available for the renewal and authorization of notifications or permits.

Alcohol and Tobacco Tax and Trade Bureau (ATTTB): ATTTB has halted its regulatory functions, noncriminal investigative activities and audit functions. But it will ensure that all tax remittances are processed because these functions have been deemed necessary for safety and protection of property.

As Congress continues to debate the necessary appropriations to fund the government’s operations, the trade community should expect further impact on trade operations.

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Non-Compete Agreements Aren’t for Everyone: The Necessity of Proving a “Legitimate Business Interest”

Womble Carlyle

It is a longstanding tenet of North Carolina law:  A company must have a legitimate business interest to justify using non-competes in its employment agreements.

Employers often focus on specific language describing the scope of their non-competes – should it be six months, one year or two years?  Should it be citywide, statewide, or is a larger territory reasonable?  And although the scope of a non-compete is critical, two recent North Carolina court decisions emphasize that you can’t use a non-compete in just any situation.  There must be a legitimate business interest which merits its use.

What qualifies as a legitimate business interest?

In Pinehurst Surgical Clinic, P.A. v. DiMichele, the NC Court of Appeals enforced an employment agreement prohibiting the defendant physician from practicing medicine in competition with the plaintiff surgical clinic for two years within a 35-mile radius of its Pinehurst facility.

In reversing the trial court’s finding of no irreparable harm, and remanding the case with instructions to grant the PI, the Court focused on several key findings which demonstrated the employer had strong, legitimate and protectable business interests to justify the use of non-competes:

  • In its more than 60 years of existence, the clinic had invested many resources “cultivating relationships with patients, employees, and various entities in the region in which it does business.”
  • The clinic annually spent significant sums “to develop and maintain a loyal patient base and goodwill in the community.”
  • The clinic provided the physician with “extensive confidential information regarding all aspects of plaintiff’s medical practice and business affairs.”
  • The clinic also provided the physician with an extensive patient base and the support necessary to maintain a successful medical practice, reputation and goodwill in the community.

In contrast – and reaching a different result – in Phelps Staffing, LLC v. C.T. Phelps, Inc., the Court of Appeals found that a staffing company failed to establish a legitimate business interest supporting its use of non-competes.   A number of factors undermined the staffing company’s case:

  • The employees at issue were “general laborers”;
  • The employees did not have access to trade secrets or proprietary information; and
  • The staffing company admitted that the primary purpose of the non-compete was to prevent competition from other temporary staffing companies.

The Court had little trouble affirming the trial court’s finding that the non-compete was “merely an attempt to stifle lawful competition between businesses and that it unfairly hinders the ability of plaintiff’s former employees to earn a living.”

These North Carolina cases are in sync with the national trend.  For example, in Gastroenterology Consultants of the North Shore v. Mick S. Meiselman, an Illinois appellate court invalidated a physician’s non-compete because the former employer failed to show a legitimate protectable interest.  The evidence showed that the doctor had been practicing in the relevant territory for about 10 years before his employment with the practice, the practice did not introduce the doctor to his patients or his physician-referral sources, the practice did not advertise, promote or market the doctor’s practice, and the doctor maintained his own office and telephone number.  The practice merely provided some administrative support for the doctor.  As a result, the practice lacked a legitimate interest to justify the non-compete.

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Department of Energy Approves Liquefied Natural Gas (LNG) Export Authorization for Freeport LNG – A Win for LNG Exports?

Bracewell & Giuliani Logo

The Department of Energy recently authorized Freeport LNG Expansion, L.P. (“FLEX”) to export LNG to non-Free Trade Agreement countries. Importantly, this is the first order on LNG exports issued by the DOE since it collected comments on its two-part LNG Export Study and likely represents the analysis DOE will use in reviewing the queue of pending LNG export applications.

FLEX proposes to export 1.4 Bcf/day from the Freeport LNG terminal, which is situated on the Gulf Coast in Texas. After filing its export application, FLEX secured long-term contracts with three entities for 88 percent of the requested export capacity; most of the gas for export would be sourced from Texas, and in particular, the Eagle Ford Shale.

By way of background, as the domestic natural gas markets shifted to favoring LNG exports in recent years, numerous applications were filed with the DOE for authorization to export LNG. In response to this onslaught, DOE commissioned a two-part study, consisting of (1) an Energy Information Administration study on the effects on increased natural gas exports on domestic energy markets; and (2) a NERA Economic Consulting study on the macroeconomic imports of LNG exports (together, the “LNG Export Study”). The NERA study has recently been the subject of substantial debate as DOE noted that it received over 188,000 comments and 2,700 reply comments, though DOE admits the majority of such comments were nearly identical form letters. Substantive and unique comments numbered nearly 800, with 11 different economic studies prepared by commenters.

In general, the FLEX order is a positive development for LNG exporters for two main reasons:  (1) DOE found the LNG Export Study to be sufficiently reliable and supportive of LNG exports; and (2) DOE strongly suggested that it would let market forces govern LNG exports (while being closely monitored by DOE). The FLEX order tracks with and builds upon DOE’s last order granting authorization for LNG exports to non-FTA countries, Sabine Pass, issued nearly two years ago. In approving the application as “not inconsistent with the public interest,” DOE considered the same public interest factors relied upon in its earlier Sabine Pass order, namely, the economic impacts, international impacts, and security of natural gas supply. DOE continued to consider the factors identified in its now-expired 1984 policy guidelines, including whether the arrangement is consistent with DOE’s policy of promoting market competition.

While at first glance the FLEX order appears to represent a big win for the LNG export industry, there are several conclusions worth attention. Arguably, the order is a broad endorsement of free-market principles as DOE determined the competitive market to be the proper mechanism for allocating a scare resource like natural gas. However, although DOE did not state it would impose limits or caps on LNG exports, DOE did indicate that it will take a “measured approach” in reviewing other pending LNG export applications. “Specifically, DOE/FE will assess the cumulative impacts of each succeeding request for export authorization on the public interest with due regard to the effect on domestic natural gas supply and demand fundamentals.” This approach suggests lower-queued applications may face a higher hurdle due to the cumulative impacts of the preceding applications and possibly suggests that DOE has a “cap” in mind. Third, DOE confirmed that the Federal Energy Regulatory Commission will conduct the environmental review, subject to independent review by DOE. Fourth, DOE found that the net economic benefits to the U.S. from LNG exports outweigh potential harms. Fifth, DOE continued to caution LNG export applicants that it will monitor the market and the impact of LNG exports and “may issue, make, amend, and rescind such orders . . . as it may find necessary . . . .” Such statements continue to inject some uncertainty into the contracting process. Finally, DOE suggested that local and regional benefits in terms of employment and income may be important in deciding whether to grant specific applications. Moreover, with respect to FLEX project, DOE noted that no one challenged the data provided by applicant in this regard.

A significant issue raised by commenters on the LNG Export Study was to what extent LNG exports would raise natural gas prices, how natural gas production would react to increased demand, and whether the net economic benefits accruing from LNG exports would outweigh negative impacts for higher domestic natural gas prices. As discussed in the FLEX order, DOE is clearly concerned about these issues, but it found arguments persuasive that the U.S. had a substantial oversupply of natural gas that would mitigate the preceding concerns. DOE cautioned that it would closely monitor the domestic natural gas markets and reiterated its authority to revise or rescind LNG export authorizations should the public interest require it. DOE did not indicate what market conditions would trigger such action, but changes in the domestic natural gas oversupply condition could be pivotal in subsequent approvals of LNG export applications or in rescinding/amending already issued export authorizations.

DOE imposed numerous conditions on the export authorization, including a requirement that FLEX must file publicly with DOE (a) all executed long-term contracts associated with the long-term export of LNG; and (b) all executed long-term contracts associated with the long-term supply of natural gas to the terminal. DOE noted that commercially sensitive provisions may be redacted. DOE also reduced the duration of FLEX’s requested 25-year export authorization and approved only a 20-year authorization.

Overall, our sense is that the FLEX order is a step in the right direction for the LNG exports industry and is a sign that, after a two-year study period, DOE once again will begin its process of issuing non-FTA export authorizations. As previously rumored, we expect that those projects that are further along in the development process (e.g., those that have completed FERC’s pre-filing process and have commercial arrangements in place for a sizable portion of the terminal capacity) will receive priority processing regardless of the project’s place in DOE’s queue. As a result, less developed projects will face greater uncertainty, especially if DOE has a “cap” in mind. Further, project sponsors should continue to include provisions in their contracts that address the possibility that DOE would modify or revoke a non-FTA authorization in the event of changes to the current domestic natural gas oversupply condition.

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