2003 International Law Update, Volume 9, Number 7 (July)

2003 International Law Update, Volume 9, Number 7 (July)

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

EXECUTIVE AGREEMENTS

By a 5 to 4 vote, U.S. Supreme Court holds that President’s complex but voluntary international arrangements to compensate Holocaust victims for insurance assets confiscated by Nazi regime preempts California statute designed to compel European insurance companies either to divulge records of insurance policies they sold in Europe between 1920 and 1945 or to forfeit their state licenses

The Nazi Government of Germany seized the value or proceeds of many Jewish life insurance policies issued before and during the World War II. In the post-war period, even a policy which had eluded confiscation was likely to be dishonored. European insurers in general either denied a policy’s existence or claimed it had lapsed because of unpaid premiums.

In addition, the German Government was unable or unwilling to furnish heirs with death certificates or equivalent documentation of the policyholder’s death. While the government and the insurance companies argue about their relative responsibilities, the fact is that the proceeds of many insurance policies issued to Jews before and during the war were either transmitted to the Third Reich or never paid at all.

These confiscations and frustrations of claims fell under the heading of reparations, a main focus of Allied post-war diplomacy. Finally, the Allies settled the duty of restitution to victims of Nazi persecution on the new West German Government. As a result, that Government not only passed restitution laws but also signed agreements with other countries to redress their nationals. Despite payments of more than DM100 billion as of 2000, however, many claimants and certain types of claims remained uncompensated.

After German reunification, class actions for restitution flowed into United States courts. The defendants were companies that had done business in Germany during the Nazi period. Complaints by defendant companies and their governments persuaded the U.S. Government to step in and try to resolve the matters. Negotiations at the national level led to the Agreement Concerning the Foundation “Remembrance, Responsibility and the Future,” 39 I.L.M. 1298 (2000) (German Foundation Agreement or GFA). In it, Germany agreed to establish a foundation funded with DM 10 billion to compensate the companies’ victims during the Nazi era. The Government and German companies contributed equally to the fund.

On his part, the U. S. President agreed that, whenever anyone sued a German company on a Holocaust‑era claim in an American court, the U.S. Government would take two steps. First it would file a statement with the court declaring that it would be in the U.S.’s foreign policy interests for the GFA to be the sole provider of both forum and remedy for such claims. Secondly, the federal government would undertake to persuade state and local governments to respect the GFA as the only apparatus for settling these claims.

With respect to insurance claims, both Germany and the U.S. agreed that the parties to the GFA would cooperate with the International Commission on Holocaust Era Insurance Claims (ICHEIC). It took shape in 1998 at the instance of several European insurance companies, along with the State of Israel, Jewish and Holocaust survivor associations, and the National Association of [American State] Insurance Commissioners. ICHEIC is a voluntary organization whose goal is to negotiate with European insurers to obtain information about, and resolution of, unpaid insurance policies. It has developed standard procedures to achieve that purpose.

The GFA has served as a prototype for like agreements with Austria and France. These cooperative efforts were able to control the release of information in ways that respected German privacy laws limiting the disclosure of business records. In April 2003, there was an unsealing of the names of over 360,000 Holocaust survivors who had owned life insurance policies issued by German insurers.

Meanwhile, the State of California began looking into these same issues. Later on it enacted legislation aimed at compelling payments by defaulting insurance companies. Along with other laws, California’s Holocaust Victim Insurance Relief Act of 1999 (HVIRA) Cal. Ins. Code Ann. Sections 13800‑13807 (West Cum. Supp. 2003) demands that any insurer doing business in the State reveal information about all policies the companies (or any one “related” to them) marketed in Europe between 1920 and 1945. Failure to comply would result in the forfeiture of its California business license. After enacting HVIRA, California issued administrative subpoenas to several subsidiaries of European insurance companies who were taking part in the ICHEIC program.

The Federal Government promptly notified California officials that HVIRA created two major problems. First, its enforcement would injure the ICHEIC, the only quick and complete means of processing unpaid Holocaust-era insurance claims with a minimum of costly and time-consuming litigation. Secondly, HVIRA might bring the GFA’s voluntary operations to a sudden stop. Despite these risks, the California insurance commissioner declared that he would vigorously implement HVIRA.

Petitioner insurance entities then filed the present action in California federal court, charging that HVIRA violated the U.S. Constitution. The court preliminarily enjoined the enforcement of HVIRA and later gave petitioners summary judgment. The Ninth Circuit reversed, holding, inter alia, that HVIRA did not disrupt the federal foreign affairs power. After granting certiorari, the U.S. Supreme Court, in a 5 to 4 opinion, reverses, ruling that HVIRA obstructs the President’s conduct of the Nation’s foreign policy and is therefore preempted.

At the outset, the majority notes that, at some point, an exercise of state power that impinges on foreign relations clearly has to surrender to the policies of the National Government. Moreover, the President, not the Congress, has the leading role in shaping those policies. In particular, the President has the power to make “executive agreements” with other nations without having to get the Senate’s consent or the approval of Congress.

It makes no difference, in the Court’s view, that the executive agreements in question with Germany, Austria and France are not alone about settling claims against other countries by American citizens but also deal with foreign claims against foreign corporations.“While a sharp line between public and private acts works for many purposes in the domestic law, insisting on the same line in defining the legitimate scope of the Executive’s international negotiations would hamstring the President in settling international controversies.” [2377]

Due to the lack of a preemption clause in the executive agreements, petitioners relied on Zschernig v. Miller, 389 U.S. 429 (1968). There, a majority of the Court held that state action with more than an incidental effect on foreign affairs is preempted, without having to show an affirmative federal activity in the same subject area, and thus without having to show a federal-state conflict.

While the worthy ends sought by both California and the President may be similar, the Court points to the sharp federal-state conflict as to means.“The basic fact is that California seeks to use an iron fist where the President has consistently chosen kid gloves. We have heard powerful arguments that the iron fist would work better, and it may be that, if the matter of compensation were considered in isolation from all other issues involving the European allies, the iron fist would be the preferable policy.”

“But our thoughts on the efficacy of the one approach versus the other are beside the point, since our business is not to judge the wisdom of the National Government’s policy; dissatisfaction should be addressed to the President or, perhaps, Congress. The question relevant to preemption in this case is conflict, and the evidence here is ‘more than sufficient to demonstrate that the state Act stands in the way of [the President’s] diplomatic objectives.’ Crosby v. National Foreign Trade Council, 530 U.S. 363, 386 (2000).” [2393]

Moreover, the Court is not persuaded by California’s argument that, even if HVIRA does interfere with Executive Branch foreign policy, Congress permitted the states to pass laws of this type in the McCarran‑Ferguson Act and in the U.S. Holocaust Assets Commission Act of 1998. To begin with, the impact of any congressional authorization on the preemption issue is far from clear. In any event, neither statute has the effect the State attributes to it.

Citation: American Insurance Association v. Garamendi, 123 S.Ct.2374, 71 U.S.L.W. 4524 (U.S.S.C. June 23, 2003).

INSURANCE

In litigation over interpretation of high risk insurance policies to cover cinematic loans made by J.P. Morgan Chase, House of Lords decides as matter of law that policies in question would exempt Chase from liability for its brokers’ negligent misrepresentations but not for their fraudulent non-disclosures

J.P. Morgan Chase (formerly Chase Manhattan Bank) (Chase) lent substantial amounts of money to finance the making of films. It also took out policies of insurance with certain insurers, HIH Casualty and General Insurance Ltd. and others (claimants). Heath North America and Special Risks Ltd and Heath Insurance Broking Ltd. (collectively Heaths) brokered the policies as Chase’s agent.

Lord Hoffman sets forth the context of this dispute. “My Lords, this appeal is concerned with a new high risk, high premium insurance product used in financing film production. The risk insured against is that a party who has advanced money for the production of a film against the security of a defined share of future revenue will fail to recoup his advance within a specified period.”

“It is high risk, first, because the commercial success of a film is notoriously difficult to predict and, secondly, because a good deal will turn upon how the lender’s revenue entitlement is defined. If all expenses have first to be paid, the lender will be subject to unpredictable cost overruns. Fees, commissions, royalties, overriding payments to director and stars and similar skimmings may also deplete the lender’s share of gross revenue. And in an industry where possession of the money tends to be nine‑tenths of the law, much will depend upon who banks the money and keeps the books. It is a form of insurance in which the players need to have their wits about them.” [¶ 25]

Each of the present policies contained a “truth-of-statement clause.” The clauses provided, in relevant part that: “[6] the Insured [Chase] will not have any duty or obligation to make any representation, warranty or disclosure of any nature, express or implied (such duty and obligation being expressly waived by the insurers) and [7] shall have no liability of any nature to the insurers for any information provided by any other parties and [8] any such information provided by, or nondisclosure by, other parties . . . shall not be a ground or grounds for avoidance of the insurers’ obligations under the Policy or the cancellation thereof.” The policies also made English law applicable to contract-related disputes and chose the English court system as the proper forum.

There turned out to be substantial shortfalls in the revenue assigned to Chase by way of security and it made claims under the policies. The claimant-insurers, however, denied liability on the grounds of misrepresentation and non‑disclosure, either fraudulent or negligent, on the part of Heaths as broker. Both sides went to court over the matter.

Chase claimed that, on a proper interpretation of the policies, the claimants were not as a matter of law entitled to disavow liability or to seek damages against it even if all the claimants’ allegations against Heaths were proven true. The first instance court thus had to decide preliminarily whether clauses [6] - [8] entitled the claimants (a) to avoid and/or rescind the policies and (b) to obtain damages from Chase for misrepresentation.

The trial judge and the Court of Appeal (Civil Division) gave different answers to these questions. The claimants then obtained review in the House of Lords. Chase cross‑appealed. The five Lords of Appeal agree to reverse the Court of Appeal in part based on the following legal analysis, one Lord dissenting in part.

The Lords first assume the truth of what the pleadings allege as against what the evidence might show at the trial. The panel initially invoked the Marine Insurance Act of 1906, as setting forth generally accepted principles of English insurance law. A central notion is that a contract of insurance demands the utmost in good faith. As a result, if either party falls short of meeting this standard, the other party may avoid the contract.

Of course, the parties may, within broad limits, write an insurance policy that modifies common law principles. First of all, Phrase [6] makes clear that the insurers did not intend to waive altogether the disclosure of material information. Instead, they were bent on relieving Chase of its disclosure obligations. This language, however, in no way exempts Heaths from its disclosure duties.

The effect of Phrase [7] was not to deny Heaths’ authority to speak for Chase. There was nothing in the phrase which could reasonably be understood as denying or restricting Heaths’ implied and apparent authority. Moreover, the language of the phrase had to bar liability for damages on Chase’s part under Section 2(1) of the Misrepresentation Act of 1967 for any negligent misrepresentation by Heaths and also for any right of the insurers to avoid the policy on that ground.

The Lords “find nothing commercially surprising in this interpretation, from the viewpoint of Chase or the insurers. In a complex transaction of this kind, the possibility that Heaths as agent might make, and fail to correct, a representation which was later held to be both untrue and negligent would be very real. Chase, distanced from the transaction, would have little knowledge of what was represented and little opportunity to correct it. It could reasonably seek protection against loss or diminution of its security on such a ground. The insurers for their part might reasonably accept this chink in their armour, recognising that their rights against Heaths in such an eventuality would remain unimpaired.” [¶ 13]

On the other hand, the Lords do not read Phrase [7] to shield Chase against liability if the deceit of its agent had induced the policy.“For, ... fraud is a thing apart. This is not a mere slogan. It reflects an old legal rule that fraud unravels all: fraus omnia corrumpit. It also reflects the practical basis of commercial intercourse. Once fraud is proved, ‘it vitiates judgments, contracts and all transactions whatsoever.’ [Cite]”

“Parties entering into a commercial contract will no doubt recognise and accept the risk of errors and omissions in the preceding negotiations, even negligent errors and omissions. But each party will assume the honesty and good faith of the other; absent such an assumption they would not deal. What is true of the principal is true of the agent, not least in a situation where, as here, the agent, if not the sire of the transaction, plays the role of a very active midwife.”[¶ 15]

Suppose, however, that a party to a written contract really does want to bar the ordinary consequences of its inducement by its agent’s fraudulent or dishonest misrepresentation or deceit. To bring this about, the Lords stress, the face of the contract would have to set forth this intention in clear and unmistakable terms. By that test, the terms of Phrase [7] fall well short.

Finally, Phrase [8] made it plain that Heaths’ innocent or negligent non‑disclosure was not to give the insurers a right to avoid the policy. The bench and bar generally admit that the English law on non‑disclosure is very strict. Any other interpretation would weaken Chase’s security to a degree that would not have been acceptable to it. This phrase, however, did not rule out the insurers’ right to nullify the contract of insurance where the breach of Heaths’ independent duty of disclosure came about through its deliberate concealment of material facts.

Since an agent to insure is subject to an independent duty of disclosure, proof that the agent had deliberately withheld from the insurer information which the agent knew, or believed, to be material to the risk, if done dishonestly or recklessly, might well make out a fraudulent misrepresentation. Assume arguendo that, in the present case, the claimants could later persuade the fact-finder that Heaths had engaged in that sort of non‑disclosure. In that case, nothing in the truth-of-statement clause would take away the claimants’ traditional right to avoid the policy and to recover damages against both Chase and Heaths.

A majority of the Lords of Appeal concludes that the insurers might be able to show at trial that they were entitled in law to either or both of the following two forms of relief. One would be to avoid and/or rescind the policies on the grounds, but only on the grounds, of Heaths’ fraudulent misrepresentation or fraudulent non‑disclosure. The other would be to obtain damages from Chase for, but only for, fraudulent misrepresentation by Heaths and fraudulent non‑disclosure by Heaths if, but only if, Heaths’ fraudulent non‑disclosure amounted to fraudulent misrepresentation.

Citation: H.I.H. Casualty and General Insurance Ltd. et al. v. Chase Manhattan Bank et al., [2003] U.K.H.L. 6, [2003] 1 All E.R. (Comm.) 349, [2003] Lloyd’s Rep. I.R. 230 (House of Lords, February 20).

INTERNATIONAL SALES

Ninth Circuit rules that, under international sales convention, sales contract between Canadian company on one side as buyer and French corporation and its wholly-owned American subsidiary on other side as sellers did not incorporate French forum selection clauses on sellers’ invoices

In February 2000, Chateau des Charmes Wines, Ltd., a Canadian wine company, agreed to buy a certain number of wine corks from Sabate U.S.A., Inc., a wholly-owned California subsidiary of Sabate France, S.A. The parties agreed on payment and shipping terms, but did not discuss other terms, and had no history of prior dealings.

Sabate France shipped the corks to Canada in eleven batches. With each shipment came an invoice specifying on its face in French that “[a]ny dispute arising under the present contract is under the sole jurisdiction of the Court of Commerce of the City of Perpignan.” The reverse side bore a clause in French declaring that “any disputes arising out of this agreement shall be brought before the court with jurisdiction to try the matter in the judicial district where Seller’s registered office is located.”

In 2001, Chateau des Charmes began to notice undesirable cork flavors in the wines bottled with Sabate’s corks. Alleging breach of contract, strict liability, breach of warranty, false advertising, and unfair competition, Chateau des Charmes sued Sabate France and Sabate USA in a California federal court. Defendants moved to dismiss based on the forum selection clauses. The district court granted the motion, holding that the invoice clauses were valid and enforceable. Plaintiff then filed this appeal. In a per curiam opinion, the U.S. Court of Appeals for the Ninth Circuit reverses and remands.

The Court first decides whether the forum selection clauses were part of the sales agreement between plaintiff and defendants. The Court points out that the United Nations Convention on Contracts for the International Sale of Goods (in force, 1988) (CISG) governs the international sale of corks since the United States, Canada and France are all Contracting States. The Court reasons, therefore, that the CISG also governs the contract status of these forum selection clauses on the invoices.

The Court concludes that, under the CISG, the parties did not agree to incorporate the invoice clauses into the sales contract.“The Convention sets out a clear regime for analyzing international contracts for the sale of goods: ‘A contract of sale need not be concluded in, or evidenced by, writing and is not subject to any other requirement as to form.’ CISG., art. 11. A proposal is an offer if it is sufficiently definite to ‘indicate[ ] the goods and expressly or implicitly fix[ ] or make[ ] provision for determining the quantity and the price,’ id., art. 14, and it demonstrates an intention by the offeror to be bound if the proposal is accepted. Id.”

“In turn, an offer is accepted if the offeree makes a ‘statement ... or other conduct ... indicating assent to an offer.’Id., art. 18. Further, ‘A contract is concluded at the moment when an acceptance of an offer becomes effective.’ Id., art. 23. Within such a framework, the oral agreements between Sabate USA and Chateau des Charmes as to the kind of cork, the quantity, and the price were sufficient to create complete and binding contracts. The terms of those agreements did not include any forum selection clause.” [531]

This refutes defendants’ contention that the invoice clauses became part of the sales agreement.“Under the Convention, a ‘contract may be modified or terminated by the mere agreement of the parties.’Id., art. 29(1). However, the Convention clearly states that ‘[a]dditional or different terms relating, among other things, to ... the settlement of disputes are considered to alter the terms of the offer materially.’Id., art. 19(3).”

“There is no indication that Chateau des Charmes conducted itself in a manner that evidenced any affirmative assent to the forum selection clauses in the invoices. Rather, Chateau des Charmes merely performed its obligations under the oral contract. Nothing in the Convention suggests that the failure to object to a party’s unilateral attempt to alter materially the terms of an otherwise valid agreement is an ‘agreement’ within the terms of Article 29.” [Id.]

The Court further points out that nothing in Chateau des Charmes’s conduct evidenced an “agreement”on the forum issue. Nor can the Court accept Sabate France’s argument that the multiple invoices it sent to Chateau des Charmes created a separate agreement as to the proper forum. In conclusion, the Court rules that the district court’s dismissal of the action was an abuse of discretion.

Citation: Chateau des Charmes Wines, Ltd. v. Sabate U.S.A., Inc., 328 F.3d 528 (9th Cir.2003).

MUTUAL LEGAL COOPERATION

EU approves agreements with U.S. on extradition and mutual legal assistance in criminal matters

With Decision 2003/516/EC, the European Union Council has authorized the signature of two agreements with the U.S. on extradition and mutual legal assistance in criminal matters. The negotiations for these agreements began last year after a Council Decision of April 26, 2002, and the agreements were signed in Washington, D.C., on June 25, 2003.

Annexed to the Decision are the two respective agreements, the “Agreement on extradition between the European Union and the United States of America,” and the “Agreement on mutual legal assistance between the European Union and the United States of America.”

The Agreement on extradition provides for extradition in cases where the crime at issue is punishable in both the EU and the U.S. with at least one year imprisonment (Article 4). Requests for provisional arrests may be made directly between the Ministries of Justice of the requesting and the requested States, as an alternative to the diplomatic channel. Interpol may also be used to transmit such requests (Article 6). If a requesting State receives several extradition requests for the same person, it may choose the State to which to extradite the person, considering factors such as where the offense was committed, the nationality of the victim, and chronological order of the extradition requests received (Article 10). If the crime is punishable by death in the requesting State, the requested State may extradite on condition that the death penalty will not be imposed (Article 13).

Attached to the Agreement is an Explanatory Note that explains that Article 10 is not intended to affect the obligations of the State Parties to the Rome Statute of the International Criminal Court, and that the Agreement does not preclude the conclusion of bilateral extradition agreements between the U.S. and EU Member States.

The Agreement on mutual legal assistance provides for enhanced cooperation and mutual legal assistance in criminal matters by permitting the exchange of bank information which may not be refused on grounds of bank secrecy (Article 4), joint investigative teams (Article 5), video conferencing (Article 6), and expedited transmission of requests (Article 7). The Agreement also provides for mutual legal assistance between administrative authorities that are investigating criminal conduct (Article 8).

The attached Explanatory Note states that EU assistance to (non-federal) local authorities of the U.S. may be granted within the discretion of the requested EU Member State (see Article 8). The Note also clarifies that refusal of assistance on data protection grounds may only be invoked in exceptional cases (see Article 9). Finally, as for the Agreement on extradition, the Agreement does not preclude the conclusion of bilateral mutual assistance agreements between the U.S. and EU Member States.

Citation: Council Decision 2003/516/EC, 2003 O.J. of the European Union (L 181) 25, 19 July 2003.

SOVEREIGN IMMUNITY

D.C. Circuit dismisses lawsuit by former hostages in Iran who were held beginning in 1979 for 444 days

In 1996, Congress passed the Federal Anti-Terrorism and Effective Death Penalty Act and the Flatow Amendment, which together waived foreign sovereign immunity and created a cause of action for individuals harmed by state-sponsored acts of terrorism. See 28 U.S.C. Section 1605(a)(7).

Subsequently, the victims and families of Americans who were held hostage in Iran beginning in 1979 for 444 days brought for the second time a class action against the Islamic Republic of Iran and its Ministry of Foreign Affairs (hereinafter “Iran”). They argued that the new statutes created a new cause of action and demanded compensatory and punitive damages of $33 billion.

Iran did not defend this action, and the district court eventually entered a default judgment on liability in August 2001. Before trial on damages, however, the U.S. Department of State notified the district court that the Algiers Accords, and 1980 bilateral agreement between the U.S. and Iran which facilitated the release of the hostages, prohibited lawsuits arising out of the hostage-taking at issue. Moreover, a few months later, an amendment to the Foreign Sovereign Immunities Act (FSIA) was enacted that specifically referred to this case. The district court dismissed for failure to state a claim.

The U.S. Court of Appeals for the District of Columbia Circuit affirms. The main issue on appeal is whether legislation specifically directed at this lawsuit, and enacted while the case was pending in the district court, provided a cause of action for the hostages and their families.

“The FSIA provides generally that a foreign state is immune from the jurisdiction of the United States courts unless one of the exceptions listed in 28 U.S.C. Section 1605(a) applies. ... At the time plaintiffs filed their complaint and up to entry of the default judgment of liability, none of the exceptions applied to this case. Section 1605(a)(7)(A), added as part of the Antiterrorism and Effective Death Penalty Act of 1996, allowed an exception to the immunity bar if plaintiffs showed that the foreign state had been designated a state sponsor of terrorism when the act occurred or as a result of the act. 28 U.S.C. Section 1605(a)(7)(A) (2000). Iran had not been so designated.”

“After the United States moved to intervene and vacate the default judgment, Congress amended the FSIA. A provision in the appropriations act stated that Section 1605(a)(7)(A) would be satisfied (that is, the immunity of the foreign state would not apply) if ‘the act is related to [this case] ...”

“Together, these amendments created an exception, for this case alone, to Iran’s sovereign immunity, which would otherwise have barred the action. The evidence purpose was to dispose of the government’s argument, in its motion to vacate, that plaintiff’s action should be dismissed because Iran had not been designated a state sponsor of terrorism at the time the hostages were captured and held, and Iran’s later designation (in 1984) rested not on the hostage crisis but on its support of terrorism outside its borders. ...” [Slip op. 17-19]

The question then is whether the Algiers Accords survived the amendments. The Algiers Accords required the U.S. to “bar and preclude the prosecution against Iran of any pending or future claim of ... a United States national arising out of the events ... related to (A) the seizure of the 52 United States nationals on November 4, 1979, [and] (B) their subsequent detention.”

Congress’ joint explanatory statements in the committee reports regarding the amendments declare that the hostages do in fact have a claim against Iran. Such a statement may abrogate an executive agreement such as the Algiers Accords, but only if it had been enacted in the form of a law. Here, Congress did not vote on those joint explanatory statements. While both the conference report and the joint explanatory statement are printed in the same document, Congress votes only on the conference reports.

Further, the President did not sign a bill embodying it. Thus, there is no clear expression in anything that Congress enacted to abrogate the Algiers Accords. A clear statement from Congress would be required for this purpose.

Citation: Roeder v. Islamic Republic of Iran, No. 02-5145 (D.C. Cir. July 1, 2003); The Washington Post, July 2, 2003, page A24.

SOVEREIGN IMMUNITY

D.C. Circuit dismisses lawsuit by Kenyan victims of 1998 bombing of U.S. Embassy in Nairobi

In the morning of August 7, 1998, a truck with explosives prepared by the al Qaeda terrorist network attempted to enter the rear parking lot of the U.S. Embassy in Nairobi, Kenya. The unarmed security guard, employed by UIIS, a contractor to the U.S. Department of State, refused to open the gate and ran for cover when one of the terrorists in the truck began shooting. The terrorist detonated the explosives, killing 44 Embassy employees, 200 Kenyan citizens, as well as injuring approximately 4,000 people. Minutes later, a truck exploded near the U.S. Embassy in Dar Es Salaam, Tanzania, killing 12 people and injuring 85.

The Appellants in the following case are a prospective class of more than 5,000 Kenyan citizens who were injured or suffered business losses as a result of the 1998 bombing of the U.S. Embassy in Nairobi. Appellants sued the U.S. under the Federal Tort Claims Act (FTCA) (28 U.S.C. 2671), claiming that the U.S. failed to warn of a potential terrorist attack and sufficiently secure the Embassy.

The district court dismissed the complaint finding exceptions applicable, namely the discretionary function, as well as the foreign country and independent contractor exceptions to the FTCA’s waiver of sovereign immunity. This appeal ensued.

The U.S. Court of Appeals for the District of Columbia Circuit affirms. The FTCA authorizes courts to hear actions for damages against the U.S. “for injury or loss of property, or personal injury or death caused by the negligent or wrongful act or omission of any employee of the Government ... if a private person ... would be liable to the claimant in accordance with the law of the place where the act or omission occurred.” See 28 U.S.C. Section 1346(b)(1). The Court then addresses the exceptions to this waiver of sovereign immunity.

The FTCA’s “discretionary function” exception bars claims that are “based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused.” 28 U.S.C. Section 2680(a). The U.S. Supreme Court outlined a two-part test for this “discretionary function” exception in United States v. Gaubert, 499 U.S. 315, 322-23 (1991): First, whether any federal statute, regulation, or policy specifically prescribes a course of action that an employee must follow. Second, if there is no such federal statute, regulation or policy, and the challenged conduct involves an element of judgment, whether the judgment is of the kind that the discretionary function exception was designed to shield.

In this case, Appellants failed to identify a federal statute, regulation or policy regarding the U.S.’s alleged negligent conduct.

“This failure is hardly surprising, for as the district court explained, ‘determinations about what security precautions to adopt at American embassies, and what security information to pass on, and to whom this information should be given, do not involve the mechanical application of set rules, but rather the constant exercise of judgment and discretion.’ ... Indeed, the Secretary of State has authority to ‘develop and implement ... policies and programs, including funding levels and standards, to provide for the security of United States Government operations of a diplomatic nature,’ 22 U.S.C. Section 4802(a)(1), and the ‘Physical Security Standards’ section of the State Department’s Foreign Affairs Manual instructs ‘project managers and regional security officers ... [to] follow all standards to the maximum extent possible.’ UNITED STATES DEP’T OF STATE FOREIGN AFFAIRS MANUAL, 12 FAM 314.1. ... In short, embassy security is vested in the discretion of State Department employees, from the Secretary to the foreign service officers at various embassies.” [Slip Op. 9-10]

The Court also rejects the Appellants’ argument that unwritten policies satisfy the FTCA’s requirements. In this case, Appellants point to the failure of the State Department’s Office of Diplomatic Security (DS) to file the usual “trip reports” after visits to the Embassy in Nairobi in 1998. There is no showing that the DS had a mandatory obligation to file such reports. Also, the alleged instances of negligence, such as failure to train and warn security personnel, are the result of budget decisions and resource allocation that the Government makes within its discretion.

Next, the FTCA’s “Foreign Country and Independent Contractor” exceptions bar Appellants’ claims that the UIIS security guards were inadequately trained and equipped. The FTCA’s waiver of sovereign immunity applies only to tortious acts undertaken by “officers or employees of any federal agency ... and persons acting on behalf of a federal agency in an official capacity.” 28 U.S.C. Section 2671. The FTCA defines “federal agency” as any agency or instrumentality of the U.S. excluding contractors. A contractor’s negligence can only be imputed to the U.S. if the contractor’s day-to-day operations are supervised by the Government.

“Appellants contend that DS designed the Embassy’s contracts for employing local guards, handled all payments to UIIS, and regularly provided advice regarding the contracts. ... Far from demonstrating day-to-day State Department supervision of the contractor, however, these allegations establish only that ‘the contract set forth detailed guidelines and regulations that the contractor was required to conform with ... [T]he government may ‘fix specific and precise conditions to implement federal objectives’ without becoming liable for an independent contractor’s negligence.”

“To be sure, appellants presented evidence that supervision of the UIIS contract amounted to a ‘full time job for one [Assistant Regional Security Officer].’ ... Although this may well constitute the sort of day-to-day supervision falling outside the independent contractor exception, Assistant Regional Security Officers are located overseas – in this case, Nairobi — and the FTCA’s sovereign immunity waiver does not extend to acts or omissions arising in territory subject to the sovereign authority of another nation. See 28 U.S.C. Section 2680(k).” [Slip Op. 19-20]

Citation: Macharia v. United States, No. 02-5252 (D.C. Cir. July 11, 2003); The Washington Post, July 13, 2003, page A24.

TAXATION

In case where U.S. defendants illegally sold liquor in Canada and avoided Canadian taxes, Fourth Circuit, in matter of first impression in the Circuit, disagrees with other precedent and finds that the common law revenue rule does not preclude prosecution under the wire fraud statute

In 1996, David Pasquantino and two others (jointly “defendants”) started smuggling liquor into Canada where taxes on liquor were much higher than in the U.S. The Defendants were convicted of using interstate wires to defraud Canada and the Province of Ontario of excise duties and tax revenues for liquor imports and sales.

The wire fraud statute provided that: “Whoever, having devised or intending to devise any scheme or artifice to defraud ... by means of false or fraudulent pretenses ... transmits ... by means of wire ... communication in interstate or foreign commerce, any writings, signs, signals, pictures or sounds for the purpose of executing such scheme or artifice, shall be fined ... or imprisoned ...”

Defendants appeal their convictions, arguing among other things that the application of the common law revenue rule precludes prosecution under the federal wire statute (18 U.S.C. Section 1343) for using interstate wires to defraud a foreign sovereign of its tax revenue. This is an issue of first impression in the Fourth Circuit.

The U.S. Court of Appeals for the Fourth Circuit, in an en banc opinion upon rehearing, affirms. The Court holds that the common law revenue rule does not preclude prosecution under the wire fraud statute in this case.

At the outset, the Court restates the issue of first impression. The issue here is whether application of the common law revenue rule puts beyond the reach of the federal wire statute the use of interstate wires for purposes of defrauding a foreign sovereign.

Section 483 of The Restatement (Third) of Foreign Relations Law of the United States (1987) describes the common law revenue rule as follows: “Courts in the United States are not required to recognize or enforce judgments for the collection of taxes, fines, or penalties rendered by courts of other states.” Although the U.S. Supreme Court has never discussed the precise scope of the common law revenue rule, it noted that many courts in the U.S. have adhered to the principle that a court need not give effect to the penal or revenue laws of foreign countries.

There is some support for the Defendants’ argument in precedent. In United States v. Boots, 80 F.3d 580 (1st Cir.), cert. denied, 117 S.Ct. 263 (1996), the First Circuit vacated convictions for defrauding Canada and the Province of Nova Scotia of excise duties and tax revenues on imported tobacco because upholding the convictions would amount to penal enforcement of Canadian customs and tax laws. See 1996 International Law Update 52.

“We reject the Defendants’ argument that affirmance of their convictions and sentences for wire fraud would be the functional equivalent of enforcing the revenue laws of Canada and the Province of Ontario, and thus in violation of the common revenue rule. In making this argument, the Defendants, and the First Circuit in Boots for that matter, miss the critical point that prosecution for violation of the federal wire fraud statute, even when the subject of the wire fraud scheme involved is certain tax revenue due a foreign sovereign, does nothing civilly or criminally to enforce any tax judgments or claims that the foreign sovereign has or may later obtain against the defendant. Neither does such prosecution enforce the revenue laws of the foreign sovereign involved. Rather, such prosecution seeks only to enforce the federal wire fraud statute for the singular goal of vindicating our government’s substantial interest in preventing our nation’s interstate wire communications systems from being used in furtherance of criminal fraudulent enterprises. Thus, the fact that the property at issue in the Defendants’ wire fraud scheme belonged to foreign governments by virtue of those governments’ respective revenue laws is merely incidental to prosecution under the federal wire fraud statute.” [Slip op. 21-22].

The dissenter opines that, pursuant to the common law revenue rule, the offenses at issue are not cognizable under the federal wire fraud statute. The revenue rule is a discretionary doctrine guided by constitutional and prudential considerations. Thus, courts need not apply the doctrine in every criminal prosecution because some foreign revenue rule is involved. The traditional rationales of the revenue rule, that foreign revenue laws of another country are issues of foreign relations that are better handled by the legislative and executive branches of the government, apply in this case. Here, the Defendants have been indicted in Canada, and the Executive should decide whether to extradite the Defendants.

Citation: United States v. Pasquantino, Nos. 01-4463, 01-4464, 01-4465 (4th Cir. July 18, 2003).

TRADEMARKS

In trademark infringement litigation brought in Germany by California clothing firm, European Court of Justice answers question of law referred by Bundesgerichtshof by ruling that protection of free movement of goods dictates that defendant who shows risk of partitioning of national markets if it has burden of proof justifies imposing burden on copyright owner to show that it initially marketed its product outside European Economic Area (EEA) and, to counter this showing, defendant would undertake burden of proving owner’s consent to later marketing of product in EEA

Stussy, Incorporated of Irvine, California owns the word and device mark “Stussy.” Stussy has widely registered the marks on its clothing such as shirts, shorts, swimwear, T‑shirts, track suits, waistcoats and trousers and markets these products globally. These items have no distinctive characteristic that would identify them as assigned to a specific sales territory.

Under a May 1995 dealership agreement, Stussy gave Van Doren (claimant), a wholesale and retail clothing company established in Cologne (Germany), exclusive rights to distribute Stussy Inc.’s products in Germany. Stussy Inc. authorized the claimant to bring legal proceedings in its own name to obtain injunctions against, and claim damages from, Lifestyle sports + sportswear Handelsgesellschaft mbH (Lifestyle), a company organized in Berlin, and Michael Orth, its managing director (collectively, defendants) for infringement of the Stussy trade mark.

Claimant then hailed defendants before the German courts. It asked the first instance court to enjoin defendants from marketing Stussy’s products, to compel defendants to disclose information about their activities since January 1995 and to award claimant damages from that date. According to claimant, in each country of the EEA, there is only one exclusive distributor and general importer for “Stussy” articles. That company contractually binds itself not to sell the goods to intermediaries for resale outside its contractual territory. Claimant also asserts that defendants are marketing “Stussy” products which it did not obtain from claimant. According to claimant, the clothing sold by defendants had originally entered the market in the United States and the trademark owner had not authorized defendants to market its products in Germany and in other Member States.

Defendants responded by asking the court to dismiss the claims on the grounds that, under EU law, the trade mark owner had “exhausted” its trademark rights as to the items in question. They maintained that they had sourced the goods within the EEA where the trade mark owner had put, or had consented to putting, its products on the market. As shown by an October 1996 test purchase, defendant Lifestyle had obtained some Stussy clothing in the EEA from a middleman who (defendants assumed) had bought it from an authorized distributor. Lifestyle also argued that it should not have to name its suppliers until after the claimant has proven the invulnerability of its distribution system.

At first instance, the court agreed with most of claimant’s positions. On appeal, however, the German court dismissed most of claimant’s demands. “The court ... held that it had been for Van Doren to plead circumstances which established it as, to some extent, probable that the goods in question originated from imports which were put on the market in the EEA without the consent of the trade mark proprietor.” [¶ 15] Claimant then appealed on a point of law to the Bundesgerichtshof (BGH) (Federal Supreme Court).

The Bundesgerichtshof, however, deemed that the resolution of the main dispute turned on the interpretation of Articles 28 EC and 30 EC and Article 7(1) of Directive 89/104/EEC. It, therefore, has stayed its proceedings and referred the following question of EC law to the European Court of Justice for a preliminary ruling under Article 234 EC (formerly Article 177):

“Are Articles 28 EC and 30 EC to be interpreted as meaning that they permit the application of national legislation under which an infringer against whom proceedings are brought on the basis of a trade mark for marketing original goods, and who claims that the trade mark right has been exhausted within the meaning of Article 7 of Directive 89/104/EEC... has to plead and, if necessary, prove that the goods marketed by him have already been put on the market in the European Economic Area for the first time by the trade mark owner himself or with his consent?” [¶ 24]

In responding to the reference, the Court of Justice reasons as follows. “In Articles 5 and 7 of the Directive, the Community legislature laid down the rule of Community exhaustion, that is to say, the rule that the rights conferred by a trade mark do not entitle the proprietor to prohibit use of the mark in relation to goods bearing that mark which have been placed on the market in the EEA by him or with his consent. In adopting those provisions, the Community legislature did not leave it open to the Member States to provide in their domestic law for exhaustion of the rights conferred by a trade mark in respect of products placed on the market in third countries. [Cites]”

“The effect of the Directive is therefore to limit exhaustion of the rights conferred on the proprietor of a trade mark to cases where goods have been put on the market in the EEA and to allow the proprietor to market his products outside that area without exhausting his rights within the EEA. By making it clear that the placing of goods on the market outside the EEA does not exhaust the proprietor’s right to oppose the importation of those goods without his consent, the Community legislature has allowed the proprietor of the trade mark to control the initial marketing in the EEA of goods bearing the mark [Cites]” [¶¶ 25, 26]

In the present case, the ECJ notes, the dispute in the main proceeding turns mainly on what the evidence shows as to where claimant’s goods had entered the market for the first time.“The claimant in the main proceedings submits that the goods were initially placed on the market by the trade mark proprietor outside the EEA, while the defendants in the main proceedings contend that they were first placed on the market within the EEA, so that the exclusive right of the trade mark proprietor is exhausted there, pursuant to Article 7(1) of the Directive. Such a situation raises the question, inter alia, of the burden of proving where the trade‑marked goods were first put on the market in cases of dispute on that point.” [¶¶ 30,31]

“The answer to the question referred should ... be that a rule of evidence according to which exhaustion of the trade mark right constitutes a plea in defence for a third party against whom the trade mark proprietor brings an action, so that the conditions for such exhaustion must, as a rule, be proved by the third party who relies on it, is consistent with Community law and, in particular, with Articles 5 and 7 of the Directive. However, the requirements deriving from the protection of the free movement of goods, enshrined, inter alia, in Articles 28 EC and 30 EC, may mean that this rule of evidence needs to be qualified.”

“Accordingly, where a third party succeeds in establishing that there is a real risk of partitioning of national markets if he himself bears that burden of proof, particularly where the trade mark proprietor markets his products in the EEA using an exclusive distribution system, it is for the proprietor of the trade mark to establish that the products were initially placed on the market outside the EEA by him or with his consent. If such evidence is adduced, it is for the third party to prove the consent of the trade mark proprietor to subsequent marketing of the products in the EEA.” [¶ 42]

Citation: Van Doren + Q. GmbH v. Lifestyle sports + sportswear Handelsgesellschaft mbH, EU: Case C-244/00, Celex No.600J0244 (Eur.Ct.Just.,2003).

WTO panel finds U.S. steel tariffs illegal. In an attempt to shelter the struggling American steel industry, the Bush administration, in March 2002, had levied tariffs of nearly 30% on most types of steel imported from Europe, Asia and South America. The administration later reduced the tariffs, exempting a further 178 steel products, presumably to defuse the dispute with Europe. On July 11, 2003, however, the World Trade Organization (WTO) handed down a formal finding that these tariffs were unlawful. The U.S. trade representative’s office announced that it would appeal the ruling to a seven-member WTO appellate body. In the meantime, the U.S. will keep the steel safeguards in place. If the ruling is upheld on appeal, the European Union plans to strike back immediately with as much as $2.2 billion in countermeasures against U. S. exports. Although the U.S. had exempted many European steel makers from its import tariffs, an EC Commission spokeswoman said that Europe will still press the WTO for the maximum available sanctions.“The exemptions were granted to help U.S. steel users, not to give European steel makers a present.” Citation: The New York Times (Brussels), Saturday, July 12, 2003 (byline of Paul Meller) The Washington Post, March 27, 2003, page E1.

Aided by AGOA, BMW (South Africa) greatly increases its auto exports to U.S. The African Growth and Opportunity Act (AGOA) of 2001 has stimulated BMW of South Africa to export much of its automobile and parts output to the U.S. The Act grants the products of qualified African countries nonreciprocal, duty-free access to the U.S. market. Each nation has to have a market-based economy, political pluralism and devotion to the Rule of Law. AGOA abolished the 2.5% import tariff on most cars made in South Africa. In the first year under the Act, South African auto industry exports to the U.S. amounted to $359 million. During 2002, these exports grew to $572.9 million. Over the last five years, BMW South Africa alone has more than quadrupled its business, with exports to the United States under AGOA accounting for one-half of that growth. More than 80 percent of the cars made at BMW South Africa’s plant near Pretoria, are for export. During 2003, an estimated 25,000 of these autos will travel 9,000 miles by rail and ship to consumers in the U.S. Citation: The New York Times Company (online), July 9,2003 (byline of Nicole Itano).

WTO finds in favor of U.S. in U.S.-Japan dispute over apple imports. On July 15, 2003, a Panel of the World Trade Organization (WTO) issued a Report in the U.S.-Japan dispute over Japan’s restrictions on apple imports. Japan maintains these restrictions to allegedly protect from the plant disease fire blight. The U.S. argued that there is no evidence that this plant disease can be transmitted by harvested apples. The Panel found that Japan’s quarantine measures were inconsistent with the WTO Agreement on Sanitary and Phytosanitary Measures because they are not based on scientific evidence or a scientific risk assessment. Citation: U.S. Trade Representative press release 2003-45 (July 15, 2003). The WTO Panel Report “Japan - Measures affecting the importation of apples (DS245) is available on the WTO website at www.wto.org.

California biotech firm settles European antitrust claims. On July 7, 2003, Chiron Corporation of California announced that it had settled the complaints raised by some European blood banks that the prices charged by F. Hoffmann-La Roche (Chiron’s European licensee) for its hepatitis and HIV tests were unreasonably high. Last October, the German Red Cross Donation Service and the Working Society of Physicians had filed with the EC Commission asking it to ban the over-pricing. Associations from the Netherlands, the United Kingdom, Finland and Luxembourg later joined in the proceeding. According to Chiron, the settlement approved by the Commission involved changing the licensing arrangements which authorize La Roche to employ Chiron’s technology in hepatitis C and HIV-1 blood-testing kits. For one, Chiron made a time-limited offer to blood banks that use “home brew” testing that would license them to go on using their own in-house technology to clear donations. In addition, Chiron agreed to furnish relief from liability for past infringements to all banks that accept the license offer. During 2002, royalties and license fees on these kits amounted to about 15% of Chiron’s total revenue of $1.28 billion. Citation: Associated Press Report (from New York Times online), Monday, July 7, 2003; 16:37:31 GMT.

Brazilian court bars building of multi-million dollar museum in Rio to be run by New York Foundation. On Wednesday, June 25, 2003, a Brazilian court forbade the building of a $250 million art museum to be run by the Guggenheim Foundation in Rio de Janeiro. An agreement between the Mayor of Rio and the Foundation signed last April would have let the project go ahead. Its many local opponents, however, objected that the government should devote large sums like this to fighting crime or to raising the level of education and healthcare in the city’s overcrowded shanty-towns. Court officials explained to Reuters that the Mayor could not lawfully go through with his deal because it did not rest on Brazilian law but on that of the United States. Moreover, the deal estimated the cost in U.S. dollars rather than in Brazilian currency. The Mayor could lodge an appeal to the Superior Federal Court in the capital of Brasilia. The Guggenheim Foundation already operates art museums in New York and Las Vegas in the U.S., in Bilbao, Spain, in Berlin, Germany and in Venice, Italy. Citation: The New York Times (online) by Reuters, June 25, 2003, filed at 7:09 p.m. ET.