2003 International Law Update, Volume 9, Number 3 (March)

2003 International Law Update, Volume 9, Number 3 (March)

Legal Analyses published by Mike Meier, Attorney at Law. Copyright 2017 Mike Meier. www.internationallawinfo.com. 

COMPETITION

In context of alleged global anticompetitive conduct in marketing chemicals used for pharmaceuticals, majority of Seventh Circuit holds as matter of first impression that FTAIA provisions pertain only to subject matter jurisdiction and do not create additional element of Sherman Act claim

United Phosphorus and Shroff’s United Chemicals (plaintiffs) are Indian chemical manufacturers. J.C. Miller & Associates, Inc., is an Illinois company which was involved in a joint venture with the plaintiffs. This action originated in trade-secret litigation in the early 1990s when Indian companies tried to acquire the technology for making chemicals needed for a tuberculosis drug. The court dismissed the prior case when then-plaintiff (and now defendant) Angus Chemical Company, a Delaware corporation, balked at a discovery order that required it to reveal the details of its manufacturing technology.

The plaintiffs then sued Angus Chemical Company and two related companies (jointly “Angus”) in 1994, claiming that Angus strove to, and did in fact, monopolize the market for certain chemicals, in violation of Section 2 of the Sherman Act. The complaint also claimed that Angus’ prior lawsuit was one of those anticompetitive activities. At issue here is the anti-tubercular drug, Ethambutol. It is vital to India because it is reputedly the country with the largest number of tuberculosis cases. One of Ethambutol’s ingredients is the chemical 2-Amino-1 Butanol (AB). To make AB requires 1-Nitro-Propane (1) (“1-NP”).

One of the defendants, Lupin Laboratories, Ltd. (an Indian company), buys AB from one of the other defendants, Angus Chemie GmbH. It is the German subsidiary of Angus Chemical Company, and currently the world’s only maker of AB. Angus Chemical Company produces 1-NP in Louisiana and is the only company manufacturing this chemical.

Early on, Angus moved to dismiss. It argued that the court lacked subject matter jurisdiction under Section 6a of the Foreign Trade Antitrust Improvements Act (FTAIA) [15 U.S.C. Section 6a] (a 1982 amendment to the Sherman Act). As relevant here, this provision limits the Sherman Act to foreign commercial conduct with a “direct, substantial, and reasonably foreseeable effect” on domestic U.S. commerce. In 2000, Angus renewed its motion to dismiss, and the Magistrate Judge granted it. Plaintiffs appealed.

After reargument en banc, the U.S. Court of Appeals for the Seventh Circuit affirms in a 5 to 4 split. The majority looks upon the jurisdictional issue as two-pronged: (1) whether subject matter jurisdiction is present, and, if so, (2) whether the district court should exercise it.

“... [T]he legislative history shows that jurisdiction stripping is what Congress had in mind in enacting FTAIA. The statute was enacted against a backdrop of almost 60 years of precedent which characterized the application of the Sherman Act to the conduct of foreign markets as a matter of subject matter jurisdiction. We must presume that Congress expects statutes to be read to conform with Supreme Court precedent. ...”

“Also ..., the courts of appeals had applied the pre-FTAIA effects test as a limit on subject matter jurisdiction. ... Nothing in FTAIA hints that Congress intended to dramatically change this approach. On the contrary, the House Report says that satisfying FTAIA would be ‘the predicate for antitrust jurisdiction.’ It also says, ‘this bill only establishes the standards necessary for assertion of United States Antitrust jurisdiction. The substantive antitrust issues on the merits of the plaintiffs’ claim would remain unchanged.’ H.R. Rep. No. 97-686 at 11 (1982). Perhaps that is why after FTAIA courts have continued to treat the issue as one of subject matter jurisdiction.” [Slip op. 24-25]

Moreover, policy factors support the jurisdictional characterization. The extraterritorial reach of the American antitrust laws may affect U.S. relations with foreign governments, so that U.S. courts should employ it with care. Furthermore, treating Section 6a of the FTAIA as jurisdictional often allows a district court to resolve the issue early in the litigation.

Then the Court explains why it agrees with the lower court on this record. “.... [T]here was virtually no evidence that the plaintiffs would have made any sales in the United States. They set out to produce a tuberculosis drug for India. ... The Lederle division of American Home Products was at the relevant time the only company in the world that had FDA approval to sell Ethambutol in the United States ...”

“In fact, it appears that the very small amount of AB sold in the United States was used as an ingredient in a product for making rocket motors, not drugs. 3M used a very small amount for this purpose, purchasing less than 0.4 percent of the world’s AB production - or $25,000 in total volume. ...” [Slip op. 27]

The district court found that plaintiffs had no actual plans to sell AB in the U.S. and that there would have been no significant AB sales opportunities in the U.S. In fact, the plaintiffs had not identified any potential AB buyer in the U.S. Thus, the district court properly dismissed the action for lack of jurisdiction.

The dissenters argue that there are at least four compelling reasons why this Court should not read the FTAIA as dealing with subject matter jurisdiction, and that suggest an “element” approach. First, The language of the statute supports the position that this is a substantive element of the claim, especially when it is contrasted to true jurisdiction-stripping statutes.

Second, the “subject matter jurisdiction” characterization does not square with Supreme Court precedent and with the law of this court. Third, the procedural consequences of such a reading would adversely affect antitrust enforcement. Finally, this jurisdictional approach fails to take into account the long history of applying U.S. antitrust laws to anticompetitive conduct abroad.

Therefore the FTAIA adds an element to the antitrust claim for cases that involve trade or commerce with foreign nations. To hold that it robs the federal courts of subject matter jurisdiction would leave the federal courts impotent to address the merits of many important cases.

Citation: United Phosphorus, Ltd. v. Angus Chemical Co., 2003 WL 910592 (7th Cir. Mar. 10, 2003).

ENVIRONMENTAL LAW

Noting similarity between CERCLA and provincial cleanup legislation, British Columbia Court of Appeal holds that governmental certificate that site is contaminated is not prerequisite to suit by private remediator against polluter to recover remediation costs

The CAE Machinery Ltd (defendant) ran an iron and brass foundry within the city of Vancouver, B.C. between 1924 and 1949. A recent survey had found copper and zinc pollution, presumably caused by the dumping of those components of brass when defendant was operating the foundry. After Workshop Holdings Ltd. (plaintiff) acquired, and set out to develop, the site, it set up a remediation plan to treat the contamination.

For business reasons, Workshop chose to remediate independently in co‑operation with the Waste Management Branch. It hoped thereby it could get approval in principle for its plan and ultimately a certificate of compliance. It did not ask for, nor did the Regional Waste Manager suggest, that a final governmental determination first has to be made under Section 26.4(2) or (3).

After approving the plan only in principle in January 1998, however, the Manager gave the land a contaminated-site designation and number, and entered it into the Contaminated Sites Registry in February 1998. No one told the defendant about the remediation process until plaintiff had finished it in April 1998. In July of that year, the Manager issued a final Certificate.

In March 1999, the plaintiff sued defendant for $119 million under Section 27(4) of the Waste Management Act, R.S.B.C. 1996, c. 482. Section 27(4) provides that “...any person, including, but not limited to, a responsible person and a manager, who incurs costs in carrying out remediation at a contaminated site may pursue in an action or proceeding the reasonably incurred costs of remediation from one or more responsible persons in accordance with the principles of liability set out in this Part.”

The defendant moved to dismiss the action which the first instance court granted. The plaintiff appealed, contesting the ruling below that a Manager’s final determination under Section 26.4 that a site was contaminated is a statutory prerequisite to a cost recovery claim under Section 27(4). The British Columbia Court of Appeal rules for the plaintiff and remands the case to the lower court.

In tracing the legislative history of the provincial legislation, the Court notes, inter alia, the influence of the U.S. approach to allocating the costs of cleaning up contaminated sites. “The [1993] amendments drew on United States Superfund legislation, The Comprehensive Environmental Response, Compensation, and Liability Act [CERCLA], enacted in 1980 in response to the Love Canal scandal and intended to address U.S. contaminated sites. The U.S. statute also provided for absolute, retroactive joint and several liability; designated current or past owners or operators of contaminated sites as well as transporters as potentially responsible persons; and created a private cause of action.”

“As with the Superfund legislation, the basic idea of Part 4 is that sites become contaminated over many years of use by many different users. The policy underlying the new scheme is to strive to hold those who benefited economically from that contamination responsible for its remediation.” [¶¶ 42, 43]

“... Judge Edward Weinfeld wrote of the comparable Superfund private cause of action in New York v. Exxon Corp. 633 F. Supp. 609 (S.D.N.Y. 1986). ‘The private recovery provisions of the statute ... assure an incentive for private parties, including those who may themselves be subject to liability under the statute, to take a leading role in cleaning up hazardous waste facilities as quickly as possible.’ He went on to conclude that governmental approval or expenditure is not a condition precedent to the bringing of a private action under the statute because: ‘...to require private parties to await governmental approval would be to restrict the overall national effort to the volume of activity which the federal government could centrally supervise, and this would defeat the Act’s basic intent.” [¶ 47]

In reversing the dismissal below, the Court summarizes its conclusion. “The coercive remediation order is available to the manager to implement government’s cleanup priorities. Voluntary and independent remediation permit private parties to remediate under the manager’s supervision. The cost recovery action permits all those who remediate to recover their reasonably incurred costs of doing so, however they came to remediate, from those who a court finds were responsible for the pollution.”

“Simply put, Section 27 is not ambiguous when read alone. It does not become so when read in the context of Part 4, or its object or its purpose. It creates a new civil cause of action, entire unto itself, as a means of requiring the polluter to pay and encouraging an owner to remediate.” [¶¶ 69, 70]

Citation: Workshop Holdings Ltd. v. CAE Machinery Ltd., 2003 A.C.W.S. J. 125; 119 A.C.W.S. (3d) 679 (B.C.C.A. Jan. 28).

PRIVATE INTERNATIONAL LAW

In proceeding to attach defendants’ assets in U.S. banks, Second Circuit upholds post-judgment attachments, ruling that government-owned Indonesian entity had waived sovereign immunity from attachment under FSIA and that New York choice-of-law principles lead to application of Indonesian property laws as construed by Indonesian government

In November 1994, Karaha Bodas Company, L.L.C. (KBC) and Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) executed a Joint Operation Contract (JOC) and an Energy Sales Contract (ESC) to develop geothermal energy extraction in the Karaha area of West Java. In both contracts, Pertamina purportedly waived “any ... right of immunity (sovereign or otherwise) which it or its assets now has or may acquire in the future...” and also “consent[ed] in respect of the enforcement of any judgment against it ...”

The JOC and the ESC specified that Indonesian law would apply to contract disputes. They also provided that a tribunal set up under the Arbitral Rules of the United Nations Commission on International Trade Law (UNCITRAL) would resolve these controversies. Neither contract contained any language relating to KBC’s right to attach any particular assets in case of a contract breach or default.

During 1997-98, an Indonesian fiscal crisis eventually led the government to cancel KBC’s projects in Karaha. KBC later filed for arbitration against Pertamina in Geneva, Switzerland, alleging that the government had breached both geothermal energy contracts. The Swiss arbitral panel ruled that KBC had been “prevented from pursuing the performance of the binding contracts that it relie[d] upon for reasons beyond its control ... [and] should not bear the consequences thereof.”

The arbitrators then awarded KBC $111.1 million in damages for lost investments and $150 million in lost profits. The Supreme Court of Switzerland dismissed Pertamina’s later appeal. An Indonesian court, however, purported to enjoin KBC from trying to enforce its Swiss judgment anywhere in the world and threatened to fine it $500,000 per diem for violations.

KBC next sought to enforce its award in a Texas federal court pursuant to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards [21 U.S.T. 2517; T.I.A.S. 6997; 330 U.N.T.S. 3]. In December 2001, the district court awarded KBC $261.1 million plus interest. The court also authorized KBC to register the new judgment in the Delaware, New York, and California federal courts pursuant to 28 U.S.C. Section 1963. Additionally, it granted KBC an ex parte writ of garnishment against the Bank of America.

KBC then presented the new judgment to a New York federal court. That court issued an ex parte writ of execution, an order to show cause and restraining notices. KBC served these on the Bank of America and on other concerned banks. As trustee of the accounts containing funds from the sale of liquefied natural gas (LNG), the Bank of America credits all LNG revenues from a particular project to a general account that operates pursuant to Trustee and Paying Agent Agreements (TPAAs). The TPAAs contained choice-of-law clauses purporting to make New York law applicable.

In opposing KBC’s order to show cause for a writ of execution, Pertamina claimed that none of the restrained accounts contained Pertamina’s property. The district court decided that the relevant Indonesian law vested ownership of all but five percent of the funds (the Retention) in the Republic of Indonesia. Pertamina and the Ministry of Finance of the Republic of Indonesia (the Ministry) appealed this decision. The U.S. Court of Appeals for the Second Circuit affirms.

The Court first clarifies the appellate issues. “The question on appeal is the ownership of the funds in the Bank of America trust accounts, which derive from sales of Indonesian liquefied natural gas (LNG), and whether such funds can be attached under New York law, as applicable pursuant to the Foreign Sovereign Immunities Act of 1976... (FSIA).” [75]

The Court applies 28 U.S.C. Section 1610(b) of the FSIA to decide whether Pertamina has waived its immunity. “Pertamina, through its use of the trust funds to channel LNG revenues, engages in commerce in New York. Under 28 U.S.C. Section 1610(b), Pertamina has thus waived its sovereign immunity from attachment in United States courts.” [83]

Because Pertamina is now liable just as an individual would be liable, the Court next decides that New York procedural law applies. In attachment proceedings involving foreign states, federal courts apply Fed. R. Civ. P. 69(a), and it requires the application of the enforcement procedures of the state where the federal court sits.

To decide ownership of the disputed funds, the Court then analyzes whether it should apply the substantive property law of New York or that of Indonesia, mainly Article 5(2) of Government Regulation 41 of 1982. In cases of true conflict, New York choice-of-law doctrine requires that it determine whether to apply New York or Indonesian substantive law by doing an “interests analysis.”

This process examines the pertinent laws and policies of both jurisdictions. “The law of the jurisdiction having the greatest interest in the litigation [is] applied and ... the facts or contacts which obtain significance in defining State interests are those which relate to the purpose of the particular law in conflict. [Cites]” [85]

The Court principally decides that no substantial conflict exists. “The Republic of Indonesia and the State of New York apply the same general rules to property disputes. The Republic of Indonesia offers the only specific rules -- Indonesian statutes and regulations -- that determine the respective rights of Pertamina and the Republic of Indonesia in the disputed funds. New York law directs us to apply these Indonesian statutes and regulations.” [85-86]

The Court next examines both New York law and Indonesian law to resolve the question of ownership of the funds. “Under New York law, the party who possesses property is presumed to be the party who owns it. [Cite] When a party holds funds in a bank account, possession is established, and the presumption of ownership follows. [Cites]. Similarly, the Indonesian Civil Code provides that ‘whoever is in control of movable goods ... shall be deemed to be the owner of such goods,’ [Cite], and the phrase ‘movable goods’ includes cash held in bank accounts, [Cite].”

“Pertamina possesses the disputed funds. Under both New York and Indonesian law, we therefore proceed from the presumption that Pertamina owns the disputed funds. It is clear, however, that this presumption may be rebutted by evidence that the Republic of Indonesia actually controlled the disputed funds, or that Pertamina merely held the funds for the Republic of Indonesia, in the manner of a trustee. [Cites] Under New York law, then, the property rights are determined by the underlying relationship between Pertamina and the Republic of Indonesia.” [86]

Assuming arguendo that the two systems of law might conflict, the Court determines that, in any event, Indonesia has a greater interest in having its law applied than does New York. “In the case at bar, Indonesian law sets forth a set of rules specifically resolving the ownership and disposition of the particular funds in dispute. [Cites] More generally, Indonesian laws also reflect a significant national interest in the eventual fate of funds from LNG exploitation...”

“And, unlike New York’s interests, Indonesia’s interests implicate the particular circumstances at issue: the use of an Indonesian governmental instrumentality to generate funds in order to maintain satisfactory foreign exchange reserves.” [87]

KBC argues (1) that Pertamina owns the funds even as a matter of Indonesian law and (2) that KBC is entitled to attach the funds regardless of their legal ownership because it had relied upon Pertamina’s ownership of those funds. The Court rejects both arguments. The Court of Appeals concludes that, under Indonesian law, all of the disputed funds except for the Retention belong to the Republic of Indonesia.

The Court then spurns KBC’s reliance argument. “KBC has not elicited evidence from which a court could conclude that KBC actually relied upon any representation that Pertamina made about KBC’s ability to recover from the disputed funds in the event of default. ... The geothermal energy contracts contain no reference to Pertamina’s obligations to make funds available in the event of default, nor do they make any mention of LNG revenues.”

“Neither Pertamina’s separate legal status nor its previous title to the LNG supports the notion that Pertamina represented that it owned the disputed funds, or that the funds were available to KBC to satisfy a default. None of Pertamina’s representations and actions, as reflected in the record, support the inference that Pertamina had an ownership interest in the disputed funds. To the contrary, Pertamina seems to have been entirely forthright about its lack of ownership rights. ...”

In the Court’s view, any reliance by KBC on these facts would have bordered on gullibility. “Other sophisticated commercial counter-parties [have] expressly sought contractual mechanisms to guarantee recovery without reliance on the accessibility of Pertamina’s assets. ... We would think that KBC, no less than others, could have arranged similar protections.”

“Having failed to bargain for such protection before the fact and having failed to identify any actual reliance, KBC now asks us in effect to rearrange nunc pro tunc the relations of Pertamina and the Republic of Indonesia in KBC’s favor. In these circumstances, we see no reason why a sophisticated commercial entity should not be required to abide by the consequences of its bargain.” [90]

With respect to proving foreign law under F. R. Civ. P. 44.1, the Court notes that Indonesia’s interpretation of its Government Regulation 41 should bear more weight than KBC’s interpretation. “We also agree with other Courts of Appeals that have suggested that a foreign sovereign’s views regarding its own laws merit -- although they do not command -- some degree of deference. [Cites] ...”

“Where a choice between two interpretations of ambiguous foreign law rests finely balanced, the support of a foreign sovereign for one interpretation furnishes legitimate assistance in the resolution of interpretive dilemmas. ... We thus conclude that Pertamina does not own any portion of the disputed funds, with the exception of the Retention.” [92]

The Court ultimately rejects Pertamina’s argument that it does not own the Retention. “While Pertamina may be under an obligation to transfer the Retention to the Ministry’s account in New York, this fact does not alter the extant allocation of ownership interests. Pertamina has not identified any Indonesian statute or regulation that grants the Republic of Indonesia ownership rights in the Retention ... As property within Pertamina’s control, which only Pertamina controls, the Retention is validly subject to attachment. ...Because this is not an appeal from a final judgment, proceedings in the district court will presumably move on to other matters.” [92-93]

Citation: Karaha Bodas Company, L.L.C., v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 313 F.3d 70 (2d Cir. 2002), as amended January 2, 2003.

PRIVATE INTERNATIONAL LAW (CRIMINAL)

Fourth Circuit reverses federal convictions for defrauding Canadian authorities of liquor tax revenues on grounds that common law “revenue rule” requires reading of American wire fraud statute so as to avoid having to interpret and enforce foreign tax laws

After Canadian “sin taxes” on alcohol and cigarettes increased to a level much higher than comparable United States taxes, David B. and Carl J. Pasquantino (defendants) conspired to take advantage of the resulting Canadian black market. They enlisted the help of drivers such as defendant Arthur Hilts and began buying large amounts of low-end liquor from stores in Maryland.”

“They would next move the liquor to New York and store it there. Then they would bootleg it into Canada in the trunks of cars. Although defendants paid all of the applicable Maryland and U.S. taxes on the liquor, they bypassed all Canadian taxes between 1996 and May 2000, the duration of the enterprise.

The Bureau of Alcohol, Tobacco and Firearms (BATF) discovered the scheme after agents noticed that eight retailers in Maryland were routinely ordering unusually large amounts of low-end liquors from wholesalers. Two store owners cooperated proactively with the agents, recording telephone conversations and advising agents of visits and calls from defendants. BATF also got hold of many other documents evidencing the scheme, such as truck rentals, motel registrations, and telephone records. BATF and the Royal Canadian Mounted Police (RCMP) variously surveilled the suspects, electronically monitoring vehicles crossing the border and recovering marked liquor bottles inside Canada.

A federal grand jury indicted defendants on six counts of defrauding Canada and the Province of Ontario of tax revenues by wire fraud. They moved to dismiss the indictment on the ground that a scheme to defraud a foreign government of tax revenues does not fall within the wire fraud statute, thus depriving the district court of subject matter jurisdiction. The district court denied the motion. The jury later convicted David and Carl Pasquantino on all six counts of the indictment and Hilts on Count I. This appeal followed.

Defendants made two appellate arguments. First, they claimed that Canada’s loss of tax revenues does not qualify as “property” within the scope of the wire fraud statute. Second, they contended that the principles underlying the common law “revenue rule” bar the prosecution.

The Court first addresses the scope of the wire fraud statute.“The threshold question here involves whether a scheme to evade the taxes of another country can be prosecuted as wire fraud by the United States government. [294] ... Wire fraud requires proof of 1) a scheme to defraud, and 2) the use of a wire communication in furtherance of that scheme. [Cite] The Supreme Court has been clear that the mail and wire fraud statutes are limited in scope to schemes aimed at causing deprivation of money or property.” [Id.]

The Court disagrees with defendants’ first argument, however, writing that they have incorrectly interpreted the definition of property as set forth in the wire fraud statute. Defendants urged that Cleveland v. United States, 531 U.S. 12 (2000), disqualifies the Canadian tax revenue from constituting property. That decision states in relevant part that “[i]t does not suffice, we clarify, that the object of the fraud may become property in the recipient’s hands; for purposes of the mail fraud statute, the thing obtained must be property in the hands of the victim.” [Id.]

Disagreeing with the interpretation, the Court responds that the statement meant that the property need only be capable of becoming property in the hands of the victim. The Court further writes that “... [I]t is well established that ‘property’ may comprise both tangible and intangible property rights [Cite], and that a government has a property right in tax revenues when they accrue. [Cite] Cleveland does not say otherwise.”

“Indeed, Cleveland recognized that the government ‘nowhere allege[d] that Cleveland defrauded the State of any money to which the state was entitled by law.’ [Cite] Here, it was alleged that Canada was defrauded of tax revenues it was entitled to by law. Canada’s right to collect taxes is therefore a sufficient property right for wire fraud purposes, unaffected by the Court’s decision in Cleveland.” [295]

Defendants’ main argument was that a scheme to defraud a foreign government of duties and taxes does not come within the wire fraud statute. Because this issue is one of first impression in the Fourth Circuit, the Court notes the contrasting decisions in two other circuits. The Second Circuit has upheld convictions for schemes to defraud a foreign government of tax revenues, while the First Circuit decided that such a scheme falls outside of the wire fraud statute.

In this Court’s view, the First Circuit is correct. “When the United States attempts to punish a crime whose sole objective is the violation of another country’s revenue laws, the ‘important concerns underlying the revenue rule’ are indeed implicated. [Cite] Though this case ‘does not require us to enforce a foreign tax judgment as such, upholding [defendants’] section 1343 conviction would amount functionally to penal enforcement of Canadian customs and tax laws.’ [Cite]” [296]

Explaining its agreement with the First Circuit, the Court gives two reasons. “First, we are of the opinion that ‘[n]o court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper.’[Cite] Second, the revenue rule allows our courts to avoid interpreting and applying foreign tax laws. [297]

“The Second Circuit opined that the validity of Canada’s revenue laws is not an issue. Rather, it has found that all that is necessary to prosecute a defendant for wire fraud in the United States is evidence that Canada imposes a duty on imported liquor, i.e., evidence of the existence of a foreign tax or duty. [Cite]”

“But recognizing the existence of a law is inherently and inescapably tied to recognizing the validity and scope of that law. Certainly, prosecuting a defendant for violations of a law, or for attempting to violate that law, requires an inquiry into the applicability and validity of the law.” [Id.]

In conclusion, the Court states “[i]n this case, the validity and operation of a foreign law is at issue... For the foregoing reasons, we reverse [defendants’] convictions and remand to the district court with instructions to dismiss the indictment.” [298-99]

Citation: United States v. Pasquantino, 305 F.3d 291 (4th Cir. 2002).

SOVEREIGN IMMUNITY

Ninth Circuit finds that foreign government may remove case to federal court even though it received original defendant’s interest by assignment after filing of state litigation

EIE Guam Corporation (EIEG) is a Guam corporation and the wholly owned subsidiary of the Japanese company, EIE International, Inc. In July 1992, EIEG obtained a $110.3 million loan from the Long Term Credit bank of Japan (Bank) to build the Hyatt Regency Guam Hotel. It also signed a construction loan agreement, note, and mortgage which allows the Bank to foreclose on the Hotel if EIEG defaults on the loan.

EIEG did in fact default on the loan in 1993, and has made no payments since 1995. In August 1995, EIEG filed suit against the bank in Guam Superior Court, and in 1999 the court barred the Bank from foreclosing on the Hotel. The Bank then assigned its claims to the Resolution and Collection Corporation (RCC) of Japan. The Bank later joined RCC as a defendant and counterclaimant under Guam Rule of Civil Procedure 25(c) [identical to Fed.R.Civ.P. 25(c)]. RCC then removed the entire action to federal district court pursuant to the Foreign Sovereign Immunities Act (FSIA) [28 U.S.C. Sections 1601-1611].

Shortly before trial, the parties agreed on a settlement during meetings on the Island of Maui, Hawaii, documented in the “Maui Term Sheet.” When further negotiations failed, however, the parties asked the court to interpret and enforce the Maui Term Sheet. Having done so, the district court ordered the parties to carry out the settlement, and the parties appealed.

EIEG argued that the removal to federal court was improper because (1) RCC is not a “foreign state” within the meaning of the FSIA, (2) the action is not “against” the Bank and the RCC so that the FSIA’s removal provision does not apply, (3) the RCC could not remove because it became an assignee only after the litigation had begun, and (4) the RCC had already submitted itself to the jurisdiction of the Guam Superior Court.

The U.S. Court of Appeals for the Ninth Circuit affirms the district court’s exercise of jurisdiction. At the same time, it issues a separate (unpublished) memorandum reversing the district court’s ruling and remanding for trial.

First, RCC’s status under the FSIA turns on whether it is “an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof...” (see Section 1603(b)(2)).

The Court explains that in deciding whether an entity falls under this definition, courts consider whether the entity is taking part in a public activity on behalf of the foreign government. The main factors include the circumstances surrounding the entity’s creation, the purpose of its activities, its independence (or not) from the government, the level of government financial support, its employment policies, and its obligations and privileges under the law of its state.

“The Japanese government created the RCC expressly to perform a public function. The district court found that the RCC was created pursuant to several laws enacted by the Japanese Diet ... ‘[T]he Japanese government created the RCC to carry out Japanese national policy related to the revitalization of the Japanese financial system.’ ...”

“‘[O]ne of the primary functions of the RCC is to purchase, administer, collect and dispose of non-performing loans purchased from failed financial institutions, such as [the Bank], at the request of the Deposit Insurance Corporation of Japan [DICJ] ... in accordance with Japanese Law.’ ... ‘[O]ther companies are not permitted to perform such activities even if they are in the loan collection business.’... ‘[T]he RCC is funded by the Japanese government,’ ... ‘Japanese law provides that the [government-owned] DICJ will compensate the RCC for all losses at the end of every fiscal year,’ ... [Slip op. 9-10] These factors suggest that RCC is an organ of the Japanese government and thus covered by the FSIA.

“A company may be an organ of a foreign state for purposes of the FSIA even if its employees are not civil servants. ... [T]he RCC and the DICJ engage in exclusive functions that other loan collection companies may not perform. As to the commercial nature of the RCC’s work, we have held that ‘Congress’ statement in the legislative history that a ‘state trading company’ and ‘an export association’ can be ‘organs’ of a foreign state indicates Congress’ belief that an entity’s involvement in commercial affairs does not automatically render the entity non-governmental.’ ... Finally, the district court’s key assertion that the RCC’s purpose ‘is to carry out Japanese national policy related to the revitalization of the Japanese financial system’ is well supported in the record.” [Slip op. 11-12] Consequently, the Court agrees that the RCC is a “foreign state” under the FSIA.

Second, the Court examines whether this is an action “against” a foreign state. Section 1441(d) of Title 28 U.S.C. permits removal to federal court of “any civil action brought in State court against a foreign state as defined [by the FSIA].”

“EIEG clearly is asserting a claim against the RCC, even though EIEG did not explicitly name the RCC as a defendant. As the district court correctly observed: ‘The complaint asserts substantial claims against the RCC, as the assignee of [the Bank’s] interest in the loans, mortgages, guarantees and security interests relating to the Hotel. Inter alia, EIE Guam’s action seeks to preclude the RCC from enforcing those agreements and mortgages. EIE Guam also asserts that the RCC is affirmatively liable to EIE Guam for damages, at least through setoff.’” [Slip op. 16]

Third, the Court responds to the argument that the RCC is barred from removing because it obtained its interest voluntarily after the litigation had commenced.

“In short, there is nothing in the text of 28 U.S.C. Section 1441(d), as interpreted by our sister circuits, to support EIEG’s argument that a foreign state must be an original defendant in order to enjoy the power to remove under the FSIA. However, as EIEG points out, the RCC is not a third-party defendant, brought into this litigation without its active consent. Rather, it is a voluntarily joined defendant.”

“The fact that a foreign state that is brought into an action involuntarily may remove under Section 1441(d) does not necessarily mean that a foreign state that chooses voluntarily to join litigation in progress, even as a defendant, enjoys the same right. ... Because the text of the FSIA removal statute does not answer this question, we turn next to its legislative history to ascertain Congress’ intent.” [Slip op. 22-23] In the Court’s view, the legislative history shows that the intent of Congress to provide a federal forum to foreign states is equally important whether the foreign state is an original defendant or whether it acquired an interest in ongoing litigation and voluntarily joined.

Finally, the Court rules that the RCC had not waived its right to remove by submitting to local court jurisdiction in Guam. Even though the RCC may have made some pre-joinder statements indicating its intent to proceed in state court, it did in fact remove the action the day after it was joined as a defendant.

Citation: EIE Guam Corporation v. The Long Term Credit Bank of Japan, Ltd., No. 02-16214 & 02-16259 (9th Cir. February 27, 2003).

TAXATION

By vote of 7 to 2, U.S. Supreme Court upholds Treasury Regulation dealing with allocation of R&D expenses in Domestic International Sales Corporation over method used by Boeing aircraft company to divert taxes and to maximize export profits

Since 1971, U.S. manufacturers could obtain special tax treatment of their export sales through a subsidiary qualified as a “domestic international sales corporation” (DISC) under 26 U.S.C. Sections 991-997. For these sales, no tax is payable on the DISC’s retained income until it is distributed to shareholders. The law thus encourages the parent company to maximize the DISC’s share of the profit, and to minimize the parent’s share.

There were three alternative ways for a parent company to divert a limited portion of its income to the DISC. See Section 994(a)(1)-(3). Each of the three assumes that the parent company has sold the product to the DISC at a hypothetical “transfer price” that produced a profit for both seller and buyer when the product was resold to a foreign customer.

U.S. legislation in 1984 allowed the use of a Foreign Sales Corporation (FSC) [see Note below]. Unlike a DISC, an FSC is a foreign corporation, part of its income being taxable in the U.S. Whereas some of a DISC’s income was tax-deferred, the 1984 statute exempted a portion of an FSC’s income from U.S. taxation. As under the DISC scheme, it remains in the parent company’s interest to maximize the FSC’s share of the taxable income (TI) generated by export sales.(The Court notes in its opinion that the differences between the DISC and FSC rules do not affect the outcome of this case.)

Specifically, this case deals with the interpretation of Treasury Regulation 26 C.F.R. Section 1.861-8(e)(3) (1979). It has been governing the accounting for research and development (R&D) expenses under both the DISC and FSC regimes. Boeing Company has used both a DISC and a FSC to maximize its export profits. Of its $64 billion in sales between 1979 and 1987, 67 percent were DISC-eligible export sales. During that period, Boeing spent $4.6 billion on R&D.

As one of the three options for transferring TI from the parent to the DISC, Boeing limited its DISC’s TI to a little more than half of the parties’ “combined taxable income” (CTI). Boeing assumed that the statute and the germane regulations gave it an unqualified right to allocate its R&D expenses to the specific products to which they were factually related, and to exclude any allocated R&D expenses from being treated as a cost of any other product.

After an audit, however, the Internal Revenue Service (IRS) reallocated the R&D costs and thereby decreased the untaxed profits of Boeing’s export subsidiaries and increased the parent company’s taxable profits. It classified all R&D expenses as an indirect cost of all export sales of products in a broadly defined Standard Industrial Classification (SIC) category (e.g., transportation equipment). As a result, Boeing turned out to owe the government $419 million. After paying the assessed taxes, Boeing brought this refund action in a Washington federal court.

The district court gave summary judgment to Boeing, concluding that Section 1.861-8(e)(3) is invalid as applied to DISC and FSC transactions. The U.S. Court of Appeals for the Ninth Circuit reversed, and the U.S. Supreme Court granted certiorari to resolve a conflict between the Eighth and Ninth circuits. In a 7 to 2 vote, the Court, in an opinion by Justice John Paul Stevens, affirms the Ninth Circuit, finding that Section 1.861-8(e)(3) is a proper exercise of the Secretary of the Treasury’s rulemaking authority.

First, Justice Stevens finds that the Secretary is entitled to deference in his interpretation of the statute, and that Boeing failed to show that the statutory text provides otherwise. As for the DISC regulations, the Justice rejects Boeing’s contention that the regulations expressly allow it to allocate and apportion R&D expenses to groups of export sales that are based on a SIC category. The regulations clearly provide that, if the taxpayer chooses the CTI method of transfer pricing (as Boeing did), then the taxpayer may choose to group export receipts according to product lines based either on two-digit SIC codes, or on a transaction-by-transaction basis.

Finally, the Court rejects Boeing’s arguments that the legislative history of the DISC scheme supports its position. “First, whereas the DISC transfer price could be set at a level that attributed over half of the CTI to the DISC, when Congress enacted the FSC provisions in 1984, it lowered the maximum allowable share of CTI attributable to an FSC to 23 percent. ... This dramatizes the point that even though the purpose of the DISC and FSC statutes was to provide American firms with a tax incentive to increase their exports, Congress did not intend to grant ‘undue tax advantages’ to firms. ... Rather, the statutory formulas were designed to place ceilings on the amount of those special tax benefits. ...”

“Second, the 1977 R&D regulation at issue in this suit had been in effect for seven years when Congress enacted the FSC provision. Yet Congress did not legislatively override 26 CFR Section 1.861-8(e)(3) (1979) in enacting the FSC provisions. ...” [1111]

[Editorial Note: Soon after its passage, the 1971 DISC statute generated an ongoing controversy between the U.S. and certain other parties to the General Agreement on Tariffs and Trade (GATT) as to whether the DISC provisions were unauthorized subsidies. To remove the DISC system as a quarrelsome issue, the U.S. assured the GATT Council in October 1982, that it would propose legislation to address the concerns of other GATT members. Congress replaced the DISC provisions in 1984 with the FSC system. In 2000, however, the European Union successfully challenged the FSC system before the World Trade Organization (WTO). In November 2000, U.S. President Clinton signed the “FSC Repeal and Extraterritorial Income Exclusion Act of 2000” (26 U.S.C. Section 114), to carry out the WTO recommendations. In August 2001, the WTO Appellate Body concluded (WT/DS108/RW) that the new statute still fails to comply with WTO trading rules. See 2001 International Law Update 141]

Citation: The Boeing Co. v. United States, 123 S.Ct. 1099 (U.S. S.Ct. 2003).

U.S. president ratifies Caribbean wildlife Protocol. A Department of State media note of March 17, 2003, makes the following announcement: “[Today] the United States deposited its instrument of ratification of the Protocol Concerning Specially Protected Areas and Wildlife to the 1983 [Cartagena] Convention for the Protection and Development of the Marine Environment of the Wider Caribbean Region [T.I.A.S. 11085] better known as the SPAW Protocol. By ratifying the ... Protocol, the United States becomes the eleventh Party to this groundbreaking international agreement, which paves the way for greater coordination and protection of marine biodiversity in the Wider Caribbean region. The SPAW Protocol highlights the region’s growing recognition of the need to conserve threatened and endangered fauna and flora...” Many of the Caribbean nations’ economies depend greatly on the health of their coastlines for tourism, fishing and other marine resources. The Protocol addresses in detail the disappearance of, or threats to, these resources through over-exploitation and damage to habitats. It will enter into force for the U.S. 30 days after the date of deposit. Two other Protocols to the Cartagena Convention deal with cooperation among the 28 nations of the region to combat oil spills (the Oil Spills Protocol, adopted in 1983), and to protect against land‑based sources of marine pollution (the LBS Protocol, adopted in 1999). Citation: U.S. Department of State, Media Note, Office of Spokesman, Washington, D. C., released on March 17, 2003.

Joint U.S.-EU Committee on technical compatibility and EU Council issue decisions. The Joint Committee established under the U.S.-EU Agreement on Mutual Recognition between the European Community and the United States of America issued three decisions regarding the authorized conformity assessment bodies. The decisions add organizations empowered to certify the electromagnetic compatibility of products. The Agreement facilitates U.S.-EU trade in technical products by providing that the parties mutually accept the other’s technical conformity assessments. - - In a related matter, the Council has suspended the EU’s obligations under the Sectoral Annex for Electrical Safety of the Agreement because the U.S. has allegedly failed to carry out its obligations. In particular, the EU alleges that the U.S. has not set up procedures for the recognition of EU conformity assessment bodies. As a result, the EU has lost market access in the U.S. for electrical products because the EU organizations cannot assess products for compatibility with U.S. requirements. Citation: 2003 O.J. of European Union (L 45) 19, 21,23, 19 February 2003 [Joint Committee decisions]; (L 23) 24, 28 January 2003 [Council suspends electrical safety annex to Mutual Recognition Agreement].

New Belgian airline has agreed to share codes with American Airlines. On March 4, 2003, SN Brussels Airlines of Belgium (SNBA) announced that it had entered into an agreement with AMR Corp’s American Airlines (AA) to share codes. This will simplify access by both airlines to each other’s computer networks. Starting with the 2003 summer season, the agreement will enable SNBA to put its code on AA’s daily route from Brussels to Chicago and also on several connecting U.S. domestic flights beyond Chicago, AA’s global hub. AA will benefit because it will be able to enter its code on several of SNBA’s routes linking Europe and Africa from Brussels. SNBA already has code-sharing arrangements with several other European airlines, including British Airways, Alitalia and Iberia. Citation: Reuters News Service, Brussels, Tuesday, March 4, 2003, 9:09 a.m. ET [from The New York Times (online).]

EU discontinues anti-dumping proceeding on imports of yarns from U.S. On February 6, 2003, EU ended its anti-dumping proceeding relating to the imports of certain filament yarns of cellulose acetate originating in Lithuania and the U.S., and released the amounts secured by provisional import duties. The Comite International de la Rayonne et des Fibres Synthetiques (CIRFS), represents 90 percent of the EU producers of cellulose acetate yarns. It had brought the complaint in 2001, alleging dumping and material injury by dumping of products from Lithuania and the U.S. Citation: 2003 O.J. of European Union (L 67) 20, 12 March 2003.

American aerospace companies agree to pay heavy penalties for unlicensed rocketry aid to China. On March 5, 2003, Hughes Electronics Corporation, a unit of General Motors, and Boeing Satellite Systems agreed to pay record penalties of $32 million to settle 123 charges of civil violations of the license requirements of U.S. export laws and regulations. The U.S. State Department applies strict controls on the export of rocketry data to hinder the development of foreign ballistic missiles. The charges here centered on unlawful transfers of rocket and satellite data to China during the 1990's. Hughes declared its “regret for not having obtained licenses that should have been obtained.” A series of Chinese rocket failures in the 1990’s had come to an end only after American companies had sold information to China on guidance systems, telemetry, aerodynamics, and rocket failures. In 1999, the U.S. expressed its concerns that China was helping Pakistan and North Korea to perfect their missile programs. Although China agreed in 2000 not to help other nations to develop ballistic missiles, the CIA reported to Congress early in 2003 that Chinese companies have continued to furnish “missile‑related items, raw materials and/or assistance” to North Korea and to several other “countries of proliferation concern.” Citation: The New York Times (online) for Thursday, March 6, 2003 (byline of Jeff Gerth).

U.S. implements revisions to Wassenaar Arrangement on Dual Use products. The U.S. Department of Commerce, Bureau of Industry and Security, which maintains the “Commerce Control List” (CCL) has issued a final rule to implement the 2002 revisions to the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies. These products are those that a country can use for either military or civilian purposes [see 15 C.F.R. Parts 740, 743, 772 and 774]. The final rule revises certain entries of products that are controlled for national security reasons in the telecommunication and information security areas. -- In a related matter, the EU has amended its Regulation 1334/2000 on the Control of Exports of Dual-Use Items. Citation: 2003 O.J. of European Union (L 30) 1, 5 February 2003 [EU amendment of Dual Use product regulation].

U.S. Nuclear Regulatory Commission issues rule on foreign source material reporting. The U.S. Nuclear Regulatory Commission (NRC) has amended its regulations that require licensees to report their holdings of source material (uranium and thorium). Currently, licensees must report to the NRC whenever they receive or transfer such materials mined outside the U.S. The amendment requires that licensees report the receipt or transfer of source material controlled under any of the various international agreements for peaceful nuclear cooperation. This amendment enables the U.S. to maintain an inventory list of such materials present in the U.S. Citation: 68 Federal Register 10362 [final rule] & 10410 [proposed rule] (March 5, 2003).

U.S. Treasury to pay claims against Cuba and Iran. The U.S. Department of the Treasury has published a Notice that the Treasury intends to pay on March 21, 2003, certain claims filed pursuant to Section 2002 of the Victims of Trafficking and Violence Protection Act of 2002 [Pub.L. 106-386, as amended by the Foreign Relations Authorization Act, Fiscal Year 2003, Pub.L. 107-228, as further amended by Section 201 of the Terrorism Risk Insurance Act of 2002 (TRIA), Pub.L. 107-297]. The Act directs the Treasury to compensate persons who hold certain categories of judgments against Cuba or Iran in actions brought under 28 U.S.C. Section 1605(a)(7). It opens up a federal judicial forum to recompense the victims of terrorism and to punish designated foreign states who have committed or sponsored such acts. Citation: 68 Federal Register 8077 (February 19, 2003).

EU again issues restrictions for persons and organizations affiliated with Osama bin Laden and Taliban. The EU has again issued various restrictions for individuals and organizations affiliated with Osama bin Laden and the Taliban of Afghanistan. For example, the EU has added the Islamic International Brigade and the Special Purpose Islamic Regiment to the list of restricted entities, implemented exceptions to the restrictions pursuant to U.N. Security Council resolution 1452 (2002). Citation: 2003 O.J. of the European Union (L 62) 24, 6 March 2003 (addition of entities to list of restricted entities, including Islamic International Brigade) & (L 53) 62, 28 February 2003 (exceptions to restrictions) & (L 53) 33, 28 February 2003 (addition of restricted entities) & (L 49) 13, 22 February 2003 (addition of individuals to list).