2004 International Law Update, Volume 10, Number 5 (May)

2004 International Law Update, Volume 10, Number 5 (May)

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

ARBITRATION

In case where worker was injured while working on ship, Fifth Circuit dismisses appeal for lack of appellate jurisdiction to review district court’s discussion of international arbitration law; dissenter opines that arbitration agreement at issue satisfies “low bar” inquiry that Congress intended courts to apply when determining whether arbitration agreements fall under Convention on Foreign Arbitral Awards

In 1999, Vinod Kumar Dahiya signed two employment-related documents in New Delhi, India, to receive two years of training and then work for two years for Neptune Shipmanagement Services (Neptune). One of the documents, the “deed,” included an arbitration clause, requiring that any dispute would be subject to arbitration in Singapore or India. During his subsequent training on the M/T EAGLE AUSTIN, Dahiya suffered injuries at the vessel’s incinerator and was treated in Louisiana.

Dahiya brought a maritime personal injury action in Louisiana state court against his employer Neptune, Talmidge International (the owner of the ship), and other parties (jointly “Defendants”). He alleged violations of the Jones Act [46 U.S.C.A. app. Section 688], general maritime law, and other applicable law. The Defendants removed to federal court because the dispute was subject to an arbitration agreement pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards [9 U.S.C.A. Sections 201-208]. Dahiya argued that the arbitration clause in the deed did not qualify as an arbitration agreement under the Convention and did not support removal pursuant to the Convention. The district court agreed that the forum selection clause was unreasonable, and remanded to state court for lack of subject matter jurisdiction and denied Defendants’ motion to compel arbitration. The Defendants sought review of the district court’s order.

The U.S. Court of Appeals for the Fifth Circuit finds that the district court’s remand deprives this Court of appellate jurisdiction to consider any part of the district court’s order.

28 U.S.C. Section 1447(d) [removal jurisdiction] bars a federal appellate court from reviewing the remand ruling no matter how erroneous it may be. Here, the district court apparently concluded that it lacked subject matter jurisdiction and remanded on that basis. That remand is unreviewable.

“That Appellants removed under Section 205 of the Convention does not vest us with jurisdiction despite Section 1447(d). In cases removed under Section 205, ‘the procedure for removal of causes otherwise provided by law shall apply.’ 9 U.S.C.A. Section 205. This ‘procedure for removal’ includes the strictures of Section 1447(d). ... Thus, when a case removed under Section 205 is subsequently remanded for lack of subject matter jurisdiction, an appellate court cannot review the order of remand.” [Slip op. 6-7]

The dissenter opines that the Court does in fact have appellate jurisdiction over the order denying arbitration and that the district court erred in refusing to order arbitration under the Convention. First of all, such an arbitration order is a separable collateral order. The Court should have reviewed the district court’s refusal to compel arbitration de novo. The forum selection clause in this case is presumptively valid under M/S BREMEN v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Dahiya failed to meet his heavy burden of showing that the forum selection clause is unreasonable.

“It is clear that both Congress ... and the Supreme Court, ... have expressed a liberal federal policy favoring the enforcement of arbitration provisions. ... This strong presumption in favor of arbitration ‘applies with special force in the field of international commerce.’ ... In light of the strong federal policy favoring arbitration, courts are to conduct a ’very limited inquiry’ when deciding whether to compel arbitration pursuant to the Convention. ...”

“Thus, this Court has outlined a simple four-step analysis for courts to perform: whether ‘(1) there is an agreement in writing to arbitrate the dispute, (2) the agreement provides for arbitration in the territory of a Convention signatory, (3) the agreement arises out of a commercial legal relationship, and (4) a party to the agreement is not an American citizen.’ ... Once an arbitration agreement is found to fall under the Convention, the district court is authorized by 9 U.S.C. Section 206 to order arbitration pursuant to the parties’ agreement, within or outside the United States. In fact, the Convention mandates that courts order arbitration. ... I would find that Dahiya’s arbitration clause easily meets all four requirements of the Convention and that the district court erred in not compelling arbitration and staying the proceedings per Appellants’ motion.” [Slip op. 45-46]

Citation: Dahiya v. Talmidge Int’l, Ltd., No 02-31068 (5th Cir. May 18, 2004).

DEFAMATION

In divided vote, House of Lords reverses Court of Appeal and reinstates damage award to celebrity U.S. model about whom London newspaper had published photographs and stories detailing her confidential treatments at Narcotics Anonymous

On February 1, 2001, The Mirror newspaper of London published a prominent front-page article about the plaintiff, Naomi Campbell, a celebrated English-born fashion model who travels widely but resides in the United States. The plaintiff had several times boasted publicly that, unlike many others in the fashion business, she was not a drug addict. The Mirror article reported that she had not been telling the truth.

In fact she is an addict, the paper reported, and often went to meetings of Narcotics Anonymous (NA) both in the U.S. and the U.K. to conquer her addiction. The headline was “Naomi: I am an addict.” Otherwise, the tone of the initial piece was to praise plaintiff’s courage in facing down her problem and to wish her well.

The Mirror captioned one of the accompanying photos, “Hugs: Naomi ... arrives for a lunchtime group meeting this week”. It depicted the plaintiff as the central figure in a small group standing on the doorstep of a building. Two persons (with pixilated faces) were shown embracing the plaintiff. The article did not mention the location of the meeting. But anyone who knew the Kings Road area well could identify the place where the group had gathered.

Ms. Campbell sued MGN Ltd, publisher of The Mirror, in the English courts seeking damages, inter alia, for breach of confidence. The matters which were alleged to be in breach of confidence or an unlawful invasion of her privacy were, first, the fact that she was attending meetings at NA, secondly, the published details of her attendance and what went on at the meetings and thirdly, the photographs taken with a telephoto lens from a nearby parked car without her knowledge or consent.

The trial judge ruled in the plaintiff’s favor and awarded her £2,500 in compensatory damages and £1,000 in punitive damages growing out of the later Mirror articles more critical of the plaintiff. The Court of Appeal (Civil Division) allowed defendant’s appeal and plaintiff obtained review in the House of Lords. In a vote of three Lords of Appeal to two, the House of Lords reverses the Court of Appeal and restores the order of the court of first instance.

The plaintiff did not so much object to defendant’s publication having set the record straight about her self-serving claims of nonaddiction. Rather, the core of plaintiff’s case was that the court should treat the details of her drug treatments, including the photograph, differently. This material was not the subject of any falsehood that justified correction. Moreover, it was information which any reasonable person, such as an attendee, who acquired it would realize had been confidentially obtained.

In opposition, the defendant urged that the treatment information was marginal and not meaningful enough to constitute a breach of confidence. It also urged that the Court of Appeal had struck the proper balance between the plaintiff’s right to protect her private life under Article 8(1) of the European Convention on Human Rights and Fundamental Freedoms as against the right to freedom of expression provided for by Article 10(1).

Plaintiff stated her position concisely in the particulars of her claim. There she alleged that: “Information about whether a person is receiving medical or similar treatment for addiction, and in particular details relating to such treatment or the person’s reaction to it, is obviously confidential. The confidentiality is the stronger where, as here, disclosure would tend to disrupt the treatment and/or its benefits for the person concerned and others sharing in, or giving, or wishing to take or participate in, the treatment. The very name ‘Narcotics Anonymous’ underlines the importance of privacy in the context of treatment as do the defendants’ own words ‑ ‘To the rest of the group she is simply Naomi, the addict.’” [¶ 83]

The coming into operation of the Human Rights Act of 1998 and the incorporation into domestic law of Articles 8 and 10 of the [European] Convention [for the Protection of Human Rights and Fundamental Freedoms, 312 U.N.T.S. 221; E.T.S. 5 (1953)] has modified the discourse in this area. “We now talk about the right to respect for private life and the countervailing right to freedom of expression. The jurisprudence of the European Court [of Human Rights] offers important guidance as to how these competing rights ought to be approached and analysed. [Thus,] new breadth and strength is given to the action for breach of confidence by these Articles.” [¶ 86]

In addition, where a case has gone to trial on the merits, an appellate court properly attaches a great deal of weight to the views which the trial judge has formed about the facts and where he thought the balance should be struck after reading and hearing the evidence first hand.

“The information contained in the [Mirror] article consisted of the following five elements: (1) the fact that Miss Campbell was a drug addict; (2) the fact that she was receiving treatment for her addiction; (3) the fact that the treatment which she was receiving was provided by Narcotics Anonymous; (4) details of the treatment ‑ for how long, how frequently and at what times of day she had been receiving it, the nature of it and extent of her commitment to the process; and (5) a visual portrayal by means of photographs of her when she was leaving the place [in London] where treatment had been taking place.” [¶ 88]

Within the Commonwealth, the Australian High Court has recently taken a leaf “from the definition of the privacy tort in the United States, where the right of privacy is invaded if the matter which is publicized is of a kind that (a) would be highly offensive to a reasonable person, and (b) is not of legitimate concern to the public: Restatement (Second) of the Law of Torts (1977), p 383, para 625D. The reference to a person of ordinary sensibilities is ... a quotation from William L. Prosser, Privacy, 48 Calif. L. Rev. 383 (1960). As Dean Prosser put it at pp. 396‑397, the matter made public must be one which would be offensive and objectionable to a reasonable man of ordinary sensibilities, who must expect some reporting of his daily activities. The law of privacy is not intended for the protection of the unduly sensitive.” [See ¶ 94]

The Court of Appeals erroneously thought the NA method less worthy of protection than private treatment by physicians. “Views may differ as to what is the best treatment for an addiction. But it is well known that persons who are addicted to the taking of illegal drugs or to alcohol can benefit from meetings at which they discuss and face up to their addiction. The private nature of these meetings encourages addicts to attend them in the belief that they can do so anonymously. The assurance of privacy is an essential part of the exercise. The therapy is at risk of being damaged if the duty of confidence which the participants owe to each other is breached by making details of the therapy, such as where, when and how often it is being undertaken, public. I would hold that these details are obviously private.” [¶ 95]

“Where the person is suffering from a condition that is in need of treatment one has to try, in order to assess whether the disclosure would be objectionable, to put oneself into the shoes of a reasonable person who is in need of that treatment. Otherwise the exercise is divorced from its context. ... The context was that of a drug addict who was receiving treatment. It is her sensibilities that needed to be taken into account.”

“Critical to this exercise was an assessment of whether disclosure of the details would be liable to disrupt her treatment. It does not require much imagination to appreciate the sense of unease that disclosure of these details would be liable to engender, especially when they were accompanied by a covertly taken photograph. The message that it conveyed was that somebody, somewhere, was following her, was well aware of what was going on and was prepared to disclose the facts to the media. I would expect a drug addict who was trying to benefit from meetings to discuss her problem anonymously with other addicts to find this distressing and highly offensive.” [¶ 98]

“The mind that [the Court of Appeal] examined [however] was the mind of the [Mirror’s] reader; this is wrong. It greatly reduces the level of protection that is afforded to the right of privacy. The mind that has to be examined is that, not of the reader in general, but of the person who is affected by the publicity. The question is what a reasonable person of ordinary sensibilities would feel if she was placed in the same position as the claimant and faced with the same publicity.” [¶ 99]

“The context for this exercise is provided by Articles 8 and 10 of the Convention. The rights guaranteed by these articles are qualified rights. Article 8(1) protects the right to respect for private life, but recognition is given in article 8(2) to the protection of the rights and freedoms of others. Article 10(1) protects the right to freedom of expression, but article 10(2) recognises the need to protect the rights and freedoms of others.”

“The effect of these provisions is that the right to privacy which lies at the heart of an action for breach of confidence has to be balanced against the right of the media to impart information to the public. And the right of the media to impart information to the public has to be balanced in its turn against the respect that must be given to private life.” [¶ 105]

The need for this kind of balancing exercise, the Lords note, was already part of English law. “But account must now be taken of the guidance which has been given by the European Court on the application of these articles. [As a Queen’s Bench opinion has declared]: ‘The European Court of Human Rights has always recognised the high importance of free media of communication in a democracy, but its jurisprudence does not ‑ and could not consistently with the Convention itself ‑ give Article 10(1) the presumptive priority which is given, for example, to the First Amendment in the jurisprudence of the United States courts. Everything will ultimately depend on the proper balance between privacy and publicity in the situation facing the court.” [¶ 106]

“The jurisprudence of the European Court of Human Rights explains how these principles are to be understood and applied in the context of the facts of each case. ... Neither Article 8 nor Article 10 has any pre‑eminence over the other in the conduct of this exercise. As Resolution 1165 of the Parliamentary Assembly of the Council of Europe (1998), para 11, pointed out, [the two Articles] are neither absolute nor in any hierarchical order, since they are of equal value in a democratic society.” [¶ 113]

“[T]he European Court [has] said that the more intimate the aspects of private life which are being interfered with, the more serious must be the reasons for doing so before the interference can be legitimate. ... According to the Court’s well‑established case law, freedom of expression constitutes one of the essential foundations of a democratic society and one of the basic conditions for its progress and the self‑fulfilment of each individual. [Cite] But there were no political or democratic values at stake here, nor has any pressing social need been identified ...” [¶ 117]

“Looking at the matter from Miss Campbell’s point of view and the protection of her Article 8 Convention right, publication of details of the treatment which she was undertaking to cure her addiction ... (the third, fourth and fifth of the five elements contained in the [Mirror] article) ‑ had the potential to cause harm to her. ... So I would attach a good deal of weight to this factor.”

“As for the other side of the balance, a person’s right to privacy may be limited by the public’s interest in knowing about certain traits of her personality and certain aspects of her private life, as ... the Supreme Court of Canada [has] recognised [Cite]. But it is not enough to deprive Miss Campbell of her right to privacy that she is a celebrity and that her private life is newsworthy.”

“A margin of appreciation must, of course, be given to the journalist. Weight must be given to this. But to treat these details merely as background was to undervalue the importance that was to be attached to the need, if Miss Campbell was to be protected, to keep these details private. And it is hard to see that there was any compelling need for the public to know the name of the organisation that she was attending for the therapy, or for the other details of it to be set out. ... The decision to publish the photographs suggests that greater weight was being given to the wish to publish a story that would attract interest rather than to the wish to maintain its credibility.” [¶¶ 119-20]

“Had it not been for the publication of the photographs, and looking to the text only, I would have been inclined to regard the balance between these rights as about even. Such is the effect of the margin of appreciation that must, in a doubtful case, be given to the journalist. ...”

“But the text cannot be separated from the photographs. The words ‘Therapy: Naomi outside meeting’ underneath the photograph on the front page and the words ‘Hugs: Naomi, dressed in jeans and baseball hat, arrives for a lunchtime group meeting this week’ underneath the photograph ... were designed to link that [sic] what might otherwise have been anonymous and uninformative pictures with the main text. ....”

“The photographs were taken of Miss Campbell while she was in a public place, as she was in the street outside the premises where she had been receiving therapy. The taking of photographs in a public street must, [Cite] be taken to be one of the ordinary incidents of living in a free community. The real issue is whether publicising the content of the photographs would be offensive. [Cite].”

“In Peck v United Kingdom [2003] 36 EHRR 719, para 62 the court held that the release and publication of CCTV forage [sic] which showed the applicant in the process of attempting to commit suicide resulted in the moment being viewed to an extent that far exceeded any exposure to a passer‑by or to security observation that he could have foreseen when he was in that street.” [¶¶ 121-22]

“The same process of reasoning that led to the findings in Peck that the Article 8 right had been violated ... can be applied here. Miss Campbell could not have complained if the photographs had been taken to show the scene in the street by a passer‑by and later published simply as street scenes.”

“But these were not just pictures of a street scene where she happened to be when the photographs were taken. They were taken deliberately, in secret and with a view to their publication in conjunction with the article. The zoom lens was directed at the doorway of the place where the meeting had been taking place. The faces of others in the doorway were pixilated so as not to reveal their identity. Hers was not, the photographs were published and her privacy was invaded.”

“Any person in Miss Campbell's position, assuming her to be of ordinary sensibilities but assuming also that she had been photographed surreptitiously outside the place where she had been receiving therapy for drug addiction, would have known what they were and would have been distressed on seeing the photographs. She would have seen their publication, in conjunction with the article which revealed what she had been doing when she was photographed and other details about her engagement in the therapy, as a gross interference with her right to respect for her private life. In my opinion this additional element in the publication is more than enough to outweigh the right to freedom of expression which the defendants are asserting in this case.” [¶¶ 123-24]

Citation: Campbell v. MGN, Ltd., [2004] U.K.H.L. 22, [2004] All E.R. (D) 67 (House of Lords, May 6) (Approved judgment).

EUROPEAN UNION

European Court of Justice rules that agreement between the EC Commission and United States officials known as Guidelines on Regulatory Cooperation and Transparency was valid in that it did not intend to create any binding international obligations without conforming to Article 300 EC

In an application filed at the European Court of Justice on June 21, 2002, the French Republic, supported by the United Kingdom, brought an action against the EC Commission under Article 230 EC to have the decision by which the Commission of the European Communities entered into an agreement with the United States annulled. The challenged arrangement is entitled Guidelines on Regulatory Cooperation and Transparency (the “contested decision” and “the Guidelines”, respectively).

At the London summit in May 1998, the EU and the U.S. (“the partners”) approved a joint declaration on the Transatlantic Economic Partnership. In essence, the partners announced that they will focus their efforts on taking down any barriers that seriously restrain transatlantic trade and investment.

This specifically included regulatory roadblocks that tend to thwart market opportunities for goods or services. It pledged to set up as soon as possible a plan that identifies areas for common actions, both bilaterally and multilaterally, with a schedule for reaching specific goals. It also entailed the securing of any necessary authority to start negotiations. A footnote to the joint statement declares that “nothing in the above text constitutes a negotiating mandate for the European Union.”

The partners then adopted an “Action Plan for the Transatlantic Economic Partnership.” It was forwarded to the Council of the European Union on November 9, 1998 (“the Action Plan”). Within that framework, the Council authorized the Commission to negotiate with a view to entering into bilateral agreements with the U.S., inter alia, in the field of technical barriers to trade.

In July 1999, the relevant directorates of the Commission and their counterparts in the offices of the U.S. Trade Representative and the Department of Commerce started discussions on the Guidelines. During the meetings, the Commission officials often pointed out that the Guidelines would not create any rights or duties at the international level between the EU and the U.S. The two sides come up with a set of unsigned Guidelines in February 2002. The conferees notified them to the Commission but they did not appear in the EU’s Official Journal.

A Commission memorandum of April 2002 also stressed two points. First, it noted that the partners will apply the Guidelines on a voluntary basis, in line with the rules and policies followed by each partner. Secondly, it affirmed that the Guidelines do not amount to an international agreement; instead, they state a result agreed to by the relevant administrative agencies of the partners. The plan was then to go before the next EU/USA summit.

Section II of the Guidelines declares a need to improve cooperation between the partners’ regulatory authorities and to champion transparency before the public. For example, the partners would strive to draw up legislation to minimize and work out potential trade conflicts between the partners and to promote trade in goods. With respect to transparency, the Guidelines aim to improve the public’s role in the regulatory process by informing them of the supporting materials and by giving them the chance to make timely comments on both pending proposals and final versions.

Under Section III, the Guidelines apply to the technical regulations referred to in the WTO’s Agreement on Technical Barriers to Trade. The officials of both sides are to apply the Guidelines on a voluntary basis as widely as possible.

On the merits, France argued two main points. The first is that the Commission lacks the competence to adopt the contested measure because the Guidelines constitute a binding international agreement. Under the separation of powers required by Article 300 EC, only the Council is competent to enter into such arrangements. See Case C‑327/91 France v Commission [1994] ECR I‑3641.

Secondly, the French Government pleaded that the Guidelines breach the EC Treaty because they limit the exercise of the Commission’s right to initiate measures under the Community’s legislative process and thereby adversely affect that process as a whole. Unpersuaded, the Full Court of the European Court of Justice dismisses the application.

First it notes that Article 300(1) declares in part that: “Where this Treaty provides for the conclusion of agreements between the Community and one or more States or international organisations, the Commission shall make recommendations to the Council, which shall authorise the Commission to open the necessary negotiations.  ...”

Article 300(2) further provides that: “Subject to the powers vested in the Commission in this field, ... the conclusion of the agreements shall be decided on by the Council, acting by a qualified majority on a proposal from the Commission. The Council shall act unanimously when the agreement covers a field for which unanimity is required for the adoption of internal rules and for the agreements referred to in Article 310.”

With respect to the first plea, the Court concludes that the text of the Guidelines makes clear the intention of the agencies not to be legally bound. “The statement in paragraph 7 of the Guidelines that they will be applied on a voluntary basis and the fact that the actions which the parties propose to adopt voluntarily as a result are described by use of the English terms ‘should’ and ‘will’ rather than ‘shall’ are decisive in that regard. That intention also emerges from certain aspects of the Guidelines’ structure, such as the absence of final clauses relating to signature, entry into force, possible amendment, termination or dispute settlement.” [¶ ¶ 33-34]

“Finally, that intention is apparent from the context in which the Guidelines were concluded, the Commission maintaining in this regard that neither the Transatlantic Economic Partnership nor its Action Plan constitutes a framework for the adoption of treaties or other legally binding instruments, while the history of the negotiations in turn demonstrates that the two sides in no way intended to create rights and obligations. It is for that reason that the Guidelines were never notified to the United States Congress, as would be required in the case of a binding international agreement.” [¶ 35] The bottom line is that the arrangement did not come within Article 300 EC.

In the Court’s view, the determination of the first plea disposes of the second one also. “[I]t must first be pointed out that it was determined in the examination of the first plea that the Guidelines are devoid of binding effect. It follows that, contrary to what the French Government claims, the Guidelines cannot impose obligations on the Commission in carrying out its role of initiating legislation.”

“Secondly, as the Commission and the Government of the United Kingdom have rightly pointed out, the power to initiate legislation includes the possibility of engaging in prior consultation and gathering all necessary information before submitting appropriate proposals. Therefore, the mere fact that a measure such as the Guidelines provides for such possibilities cannot be alleged to undermine the Commission’s power of initiative.” [¶¶ 50-51]

Citation: Republic of France v. EC Commission, EU: Case C-233/02, Celex No. 602J0233 (E.C.J., Full Court, March 23, 2004).

GARNISHMENT

In garnishment litigation where Securities and Exchange Commission was one of parties, British Columbia Court of Appeal applies equitable principles to dismiss appeal from order setting aside garnishment against bank which (unknown to court) lay under freeze order plus taking into account failure of claimant’s attorney to inform court of material matters

According to Canadian and United States court records, Edward Andrew Durante boasts a long history of criminal and regulatory penalties for various fraud - related offenses. At the time of this litigation, he was serving a jail term in the U.S. for stock fraud.

The U.S. Securities & Exchange Commission (SEC) had traced his operations to a Vancouver, British Columbia, brokerage firm. Durante had apparently processed his ill-gotten gains through this firm, the funds having ended up in the garnishee Exchange Bank & Trust Inc.[EBT] account at the Bank of Montreal in British Columbia.

Plaintiff, Michael Jason Evans, is trying to collect on his California default judgment against Durante by garnishing the latter’s deposits in EBT. The original judgment consisted of about U.S. $38 million. When converted to Canadian currency plus interest etc. it amounted to over Can. $63 million. as of December 2002. Apparently pursuant to a plea bargain in New York federal court, Durante had deposited $19 million in the EBT. The EBT, however, was claiming that Durante had already distributed most of these funds to his overseas connections. Counsel for both sides had agreed not to move against the EBT funds without giving notice to the other side.

The SEC is litigating as trustee for a number of American victims of Durante’s alleged frauds. Four other depositors not linked to Durante’s activities are also claiming in debt against the EBT. Their issues raised the question of priority in relation to plaintiff for the payment of amounts deposited in the EBT and these matters are still pending before different judges in the lower courts.

Before December 2002, plaintiff had obtained garnishment orders against EBT. On December 18, hoping to gain priority over other EBT debtors, plaintiff had obtained, ex parte, an absolute garnishment order and the next day a garnishing order after judgment. No one else appeared in the chambers proceeding though plaintiff’s attorney, Mr. Steven Antle, claims to have served Durante and the EBT. Antle did not serve the third party debtors, however, nor did he tell the chambers judge about their claims. Theoretically at least, the main effect of the ex parte orders was to obligate the bank to pay Durante’s entire default judgment into court.

Mr. Antle did not reveal to the chambers judge his client’s intentions vis-a-vis the other creditors. Nor did he notify the judge that the British Columbia Securities Commission (BCSC) already had gotten a freeze order on these deposits, thus preventing the EBT from paying anything out.

The chambers court first found that plaintiff had standing to move to set aside the garnishment orders. The judge next set them aside, on general principles of equity, because of Mr. Antle’s material non-disclosures during the December 18 hearing.

Among the other material facts known to plaintiff and Mr. Antle which they did not bring to the judge’s attention were the likelihood that Durante’s title to his EBT deposits may be defective as the unlawful take from the securities frauds to which Durante had pleaded guilty in the New York federal court in December 2001. That court had also ordered Durante to disgorge profits of over U.S. $33.7 million. The SEC claimed the funds as trustee on behalf of those defrauded shareholders. Thus, along with the unrelated bank debtors, the SEC was vigorously contesting the plaintiff’s claim to the funds.

The chambers court set aside the garnishment orders and plaintiff appealed. Essentially agreeing with the lower court, the British Columbia Court of Appeal unanimously dismisses. The Court’s opinion explains. “Quite apart from the issue of notice to the other claimants, I share the chambers judge’s view that Mr. Antle should have told him that EBT was not in the position to comply with the requirements in the garnishing order after judgment, either to pay into court what it owed to Durante or file a dispute.”

“With that information the chambers judge would have seen a different case, one that involved the B.C. Securities Commission, the freezing order and other parties. The appellant’s tidy, simple case for an order absolute would have been revealed as the complex matter that it really was.” [¶ 22]

Plaintiff contended that the lower court’s orders did not actually bar the other claims, especially not those of the SEC. The Court notes the superficial attractiveness of this point.

“To the extent that the SEC can trace proceeds of fraud to the fund, it will achieve full recovery on equitable principles and need not be concerned about the orders. However, the SEC may have to be content with an alternate remedy at law if it does not succeed in the tracing process. Then the SEC and the other claimants would find themselves behind the [plaintiff’s] $63 million order absolute when it comes time to sort out entitlement and priorities. If the parties have to share the fund proportionally, the [plaintiff] will get the lion’s share. The ultimate effect of the order, had it stood, might well have been to virtually eliminate the other claims.” [¶ 28]

“[It was submitted by] the SEC that the [plaintiff] ought to have brought to ‘the chambers judge’s attention that the funds are claimed by the SEC as trust funds and, if that be so, then there is no debt owing from EBT to Durante, at least insofar as the Bank of Montreal deposits are concerned. The SEC’s trust claim [of $33,700,000] exceeds the amount on deposit.” [¶ 29] Since Mr. Antle was fully aware of the SEC’s claim, it was wrong for him to conceal it when he was asking for an order absolute.

“This appeal can be disposed of on the sole ground that the appellant was not entitled to the order absolute on the merits of the application. But counsel’s behaviour is sufficiently concerning that I think it is necessary to dismiss the appeal on the additional and independent ground of a failure to make full and frank disclosure of material facts.” [¶ 35]

As the chambers judge had declared in paragraph 33 of his opinion: “If there is suppression, the court will not inquire if it would have been entitled to make the same order but only if the matters omitted required full discussion and notice should be given. These and other cases make it clear that the principle of full and fair disclosure is one of our most fundamental principles of justice. Its abuse simply cannot be justified.”

Citation: Evans v. Silicon Valley IPO Network, 2004 A.C.W.S.J. 3135, 129 A.C.W.S. (3d) 520 (B.C.C.A. 2004).

TAXATION

In matter of first impression, U.S. Tax Court reviews the “check-the-box” regulations in the context of foreign companies

In the following case, the U.S. Tax Court addresses the interaction between the so-called “check-the-box” regulations and the definition of foreign personal holding company income. In particular, the Court reviews whether the deemed sale of assets immediately after their deemed receipt (pursuant to the check-the-box regulations) from a disregarded foreign entity gives rise to “foreign personal holding company income” (FPHCI).

Dover Corporation is a diversified industrial manufacturer incorporated in Delaware. It is publicly traded and has its main place of business in New York. Dover filed a consolidated income tax return for its group of companies.

In the United Kingdom (UK), Dover conducted its elevator business through a UK subsidiary that in turn owned subsidiary, Hammond & Champness Limited (H&C). In June 1997, Dover sold H&C to a German industrial conglomerate, Thyssen, for the entire issued share capital of H&C. In December 1998, Dover requested the Internal Revenue Service (IRS) to grant an extension of time for H&C to file a retroactive election to be a disregarded entity for Federal tax purposes (9100 relief).

The IRS eventually granted Dover’s request, but stated that “no inference should be drawn from this letter that any gain from the sale of ... [H&C’s] assets immediately following its election to be disregarded as an entity separate from its owner gives rise to gain that is not foreign personal holding company income as defined in section 954(c)(1)(B) of the Internal Revenue Code.” Section 954(c)(1)(B)(iii) defines FPHCI in part, and is part of Subpart F that concerns controlled foreign corporations (CFCs). Section 951(a)(1)(A)(I) provides that each U.S. shareholder of a CFC shall include in gross income certain amounts, including the “pro rata share” of the CFC’s subpart F income for the taxable year.

Subpart F income includes foreign base company income, which in turn includes FPHCI. Under Section 954©), FPHCI is “the portion of the gross income which consists of: .... (B) Certain property transactions. – The excess of gains over losses from the sale or exchange of property — ... (iii) which does not give rise to any income.”

Subsequently, H&C made an election on Form 8833 [Entity Classification Election] to be disregarded as a separate entity. The IRS assessed a federal income tax deficiency for 1996 and 1997 totaling approximately $34 million, due largely to the sale of H&C.

The “check-the-box” regulations issued in December 1996 permit most domestic and foreign businesses organizations (included single-owner organizations) to elect between association and partnership classification for federal tax purposes. Single-owner organizations may elect “to be recognized or disregarded as entities separate from their owners.” (Section 301.7701-1(a)(4), Proced. & Admin. Reg.). The preamble to the final regulations warns that the U.S. Treasury and the IRS will monitor the uses of partnerships in the international context and take appropriate action when partnerships are used to reach results that are inconsistent with rules, policies, or U.S. tax treaties.

The U.S. Tax Court concludes that the Dover’s UK gain on the deemed sale of the H&C assets does not constitute FPHCI to Dover under Section 954(c)(1)(B)(iii).

Dover argues that the check-the-box regulations override the principle that the separate entity status of a corporation may not be ignored for federal tax purposes. Consequently, Dover’s UK subsidiary was deemed engaged in H&C’s business and H&C assets are excluded from the definition of property “which does not give rise to any income.” Thus, Dover’s sale of H&C assets did not give rise to FPHCI under Section 954(c)(1)(B)(iii).

The IRS responds that the deemed sale of the H&C assets was not a sale of property used or held for use in Dover’s UK business. Therefore, the property was not excluded from the definition of property “which does not give rise to any income.” Thus, the deemed sale gave rise to FPHCI taxable to Dover.

“Respondent specifically acknowledges that, for tax purposes, H&C’s disregarded entity election constituted a deemed section 332 liquidation of H&C into Dover UK, whereby H&C became a branch or division of Dover UK. Respondent refers to the disregarded entity election as a ‘check-the-box liquidation’ and states that there is no difference between it and an actual section 332 liquidation.”

“Accordingly, the principal question before us is whether, attendant to a section 332 liquidation, the transferee parent corporation succeeds to the business history of its liquidated subsidiary with the result that the subsidiary’s assets used in its trade or business constitute assets used in the parent’s trade or business upon receipt of those assets by the parent.” [...]

“ ...[R]espondent, nevertheless, argues: ‘Dover UK must *** use, or hold for such, such assets for the requisite period of time in its trade or business before Dover UK is allowed to exclude from FPHCI the gain from the [deemed] sale of those assets.’ Respondent refuses to attribute H&C’s business history to Dover UK ...”

“... [A]s direct result of a section 332 liquidation of an operating subsidiary, the surviving parent corporation is considered as having been engaged in the liquidated subsidiary’s preliquidation trade or business, with the result that the assets of that trade or business are deemed assets used in the surviving parent’s trade or business at the time of receipt. ... As stated by respondent on brief, ... ‘there is no difference between a check-the-box liquidation and an actual liquidation.’ Therefore, ... we conclude that respondent has conceded that Dover UK’s deemed sale of the H&C assets immediately after the check-the-box liquidation of H&C constituted a sale of property used in Dover UK’s business within the meaning of section 1.954-2(e)(3)(ii) through (iv), Income Tax Regs.” [Slip op. 48-54]

Citation: Dover Corp. v. Commissioner of Internal Revenue, No. 12821-00 (U.S. Tax Ct. May 5, 2004).

TERRORISM

Fourth Circuit considers issue of first impression as to defendant’s access to witnesses held by U.S. Government abroad in prosecution of Zacarias Moussaoui, an alleged co-conspirator of the September 11, 2001, terrorist attacks

Zacarias Moussaoui has been charged with terrorist offenses and is considered by some the 20th hijacker of the September 11, 2001, attacks. According to the indictment, there are parallels in the training of the hijackers and Moussaoui, first at an al Qaeda training camp and later at a flight school in the U.S.

Moussaoui sought access to several witness (who are considered enemy combatants and whose names are classified) who are being held abroad, to depose them pursuant to the Federal Rules of Criminal Procedure. The Government refused to produce those witnesses and instead proposed substitutions for the witness depositions.

The district court opined that those witnesses could provide material, favorable testimony on Moussaoui’s behalf, and imposed sanctions on the Government for not providing access. The Government appealed the district court’s rulings as to Moussaoui’s access to those witnesses.

The U.S. Court of Appeals for the Fourth Circuit, in a fragmented opinion, affirms in part, vacates in part, and remands. The Court agrees that the witness deposition substitutions proposed by the Government are inadequate and that proper substitutions must be provided to Moussaoui. Also, the Court reverses the sanctions imposed on the Government.

The Government first argues that the district court should not have ordered the production of enemy combatant witnesses for depositions, and notes that they are non-citizens outside the U.S. boundaries.

“The Government’s argument rests primarily on the well established and undisputed principle that the process power of the district court does not extend to foreign nationals abroad. ... (‘The United States does not have subpoena power over a foreign national in a foreign country.’) Were this the governing rule, Moussaoui clearly would have no claim under the Sixth Amendment. ... This is not the controlling principle, however.”

“The Government’s argument overlooks the critical fact that the enemy combatant witnesses are in the custody of an official of the United States Government. Therefore, we are concerned not with the ability of the district court to issue a subpoena to the witnesses, but rather with its power to issue a writ of habeas corpus ad testificandum (‘testimonial writ’) to the witnesses’ custodian. See 28 U.S.C.A. Section 2241( c)(5) ...” [Slip op. 17-18]

Therefore, the critical question is not whether the district court can serve the witnesses, but whether it can serve the custodian. Here, it appears that the witnesses are in military custody, and thus Secretary of Defense Donald Rumsfeld is their ultimate custodian. Even if the immediate custodian of the witnesses were in a foreign country, the district may have the power to issue a testimonial writ. In Carbo v. United States, 364 U.S. 611 (1961), the U.S. Supreme Court concluded that the writ of habeas corpus ad prosequendum (‘prosecutorial writ’) may issue extraterritorially. The same reasoning applies to the testimonial writ.

In light of the national security interests at issue and the Government’s refusal to make the enemy combatant witnesses available for regular depositions, the Court remands for crafting substitutions for the deposition testimony of the witnesses.

Dissenting Judge Wilkins concludes, based on separation of powers principles, that the district court lacks authority to order the custodian to produce these enemy combatant witnesses who are detained abroad. The majority’s approach jeopardizes national security and intrudes on the Executive’s war-making, military and foreign relations duties. Moussaoui does not have a Sixth Amendment right to the witnesses’ compulsion, but rather a Fifth Amendment right to introduce material, favorable information from these witnesses.

“Returning to the issue presented in this case, the district court’s orders required the custodian to interrupt **** aliens detained overseas, the practical effect of which would be to eliminate the ability of the custodian to **** any further information that could help save the lives of American citizens or our allies. Given the Supreme Court and this court’s unequivocal statements regarding the primacy of Executive authority over both aliens and intelligence gathering during wartime, and the serious national security risks that would result from granting access, I conclude that separation of powers principles prohibit the district court from issuing its ... orders granting access to the witnesses. Where the court lacks the authority to compel production or testimony of a witness, the defendant is not entitled to any remedy for that lack of authority. .... (‘It is well established that convictions are not unconstitutional under the Sixth Amendment even though the United States courts lack power to subpoena witnesses, (other than American citizens) from foreign countries.’); ....” (Deletions marked with **** in original) [Slip op. 92-93]

Citation: United States v. Moussaoui, No. 03-4792 (4th Cir. April 22, 2004).

NAFTA panel rules for Canada in softwood lumber dispute with U.S. On April 29, 2004, a North American Free Trade Agreement (NAFTA) panel decided that the U.S. had failed to put on substantial evidence that Canadian shipments of softwood lumber were injurious to American companies. Proof of such injury is central to the question of whether the U.S. can lawfully go on imposing anti-dumping and countervailing duties against the $6 billion worth of Canadian wood sold annually in the U.S. Since 2001, these U.S. duties have averaged about 27 percent. During 2003, the two governments had talked about replacing the American duties with a new import quota on Canadian spruce, pine, fir and other woods used to build and remodel houses. WTO tribunals have also heard various aspects of the softwood lumber dispute between the U.S. and Canada. See, for example, 2004 International Law Update 28 & 59. Citation: Reuters News Service, Washington, D. C., Thursday, April 29, 2004 (from http://news.findlaw.com); Daily Miner & News (Kenora, Ontario), May 8, 2004.

European Union issues comprehensive regulation on mergers and acquisitions. The EU Commission has issued Regulation No 802/2004 on the control of concentrations between undertakings. The purpose is to control company concentrations as provided for in Council Regulation No 139/2004. It provides for a specific process for the notification of such concentrations, including a form to be used to notify the EU. If the Commission intends to issue a decision on the matter, it will provide for an oral hearing. Citation: 2004 O.J. of the European Union (L 133) 1 (30 April 2004).

U.S. Trade Representative releases Special 301 Report. On May 3, 2004, the U.S. Trade Representative issued its annual “Special 301" (named after Section 301 of the Trade Act of 1974, as amended) Report on the adequacy and effectiveness of intellectual property (IP) protections by trading partners abroad. The Report concludes that the lack of IP protection and enforcement is a continuing, global problem, and cites in particular the unauthorized copying of optical media (CDs, DVDs and CD-ROMs). Rampant piracy continues in the Ukraine, Paraguay, China, Brazil, Russia, Pakistan, and other countries. The Report, however, also includes a list of positive developments in IP protection worldwide during the past year. The Report lists the Ukraine as a priority foreign country, China and Paraguay as Section 306 countries, and numerous other countries on the Priority Watch List and a general Watch List. Citation: U.S. Trade Representative Press Release 2004-36 (May 3, 2004). The complete Special 301 Report is available at www.ustr.gov.

U.S. Federal Reserve fines leading Swiss bank. On May 10, the Federal Reserve Bank of New York imposed a fine of $100 million on UBS AG, Switzerland’s largest bank, for allegedly forwarding dollars to Cuba, Libya, Iran and Yugoslavia in breach of American sanctions against those nations. Under contract with the American bank, UBS had been running a trading depot for dollars at its Zurich headquarters. Its function was to further the circulation of new U.S. notes and the retirement of old ones. The contract specified, however, that UBS was to refrain from sending or receiving dollar notes to, or from, banks in countries subject to U.S. trade sanctions. The Federal Reserve rescinded this contract in October of 2003. The former UBS officials involved had carried out their schemes by falsifying UBS’ monthly reports to the U.S. central bank. Without admitting wrongdoing, UBS has agreed to pay the fine. The Swiss Federal Banking Commission has reproved UBS and will look into its operations to make sure that its curative actions are effective. Citation: MSNBC (online), updated by The Associated Press, Washington, D.C., Monday, May 10, 2004 at 11:58 a.m; The American Banker (May 11, 2004).

Chinese congress delays full suffrage for Hong Kong. On April 26, 2004, the powerful Chinese National People’s Congress Standing Committee ruled that “universal suffrage” shall not apply to the selection of a new chief executive for Hong Kong in 2007 nor to choosing all members of the Hong Kong Legislative Council in 2008. According to China’s official news agency Xinhua, the mainland will let Hong Kong make changes to its electoral methods but only “in the principle of gradual and orderly progress”. Hong Kong’s mini‑constitution, the Basic Law, held out the possibility that ordinary residents could elect their next leader in 2007 and all of its lawmakers by 2008. To Hong Kong’s 6.8 million residents, Beijing suggested that Hong Kong’s system of partial democracy gives ordinary people more input than they had under 156 years of British colonial rule. Although ordinary Hong Kong residents have no say in picking their leader, they will directly elect 30 of 60 Legislative Council members in September, up from 24 the last time. Citation: Associated Press (online), Hong Kong, Monday, April 26, 2004, 08:40:38 GMT (byline of Min Lee, AP writer); Los Angeles Times, April 26, 2004, page A8.

EU restricts U.S. and Canadian poultry products because of avian influenza. Avian influenza is a contagious viral disease in poultry and birds. Outbreaks of that disease have occurred in the U.S. and Canada. Based on the risk of that disease appearing in the EU, the Commission has issued Decisions 2004/363/EC and 2004/364/EC with protection measures against the disease coming from the U.S. and Canada. The decisions provide that only poultry products from specified regions in the U.S. and Canada may enter the EU, or if the products have been especially treated. Citation: 2004 O.J. of the European Union (L 114) 19 & 22 (21 April 2004); correction at 2004 O.J. (L 176) 8 (11 May 2004); Europe Agri, April 16, 2004, No. 0153.

U.S. and Panama sign reciprocal shipboarding agreement. On May 12, 2004, the U.S. and Panama signed a reciprocal, maritime shipboarding agreement in support of the Proliferation Security Initiative (PSI). Pursuant to the agreement, U.S. or Panamanian-flagged vessels suspected to carry controlled cargo may be boarded by each party for inspection. – Panama is the world’s largest registry of vessels. The U.S. has already signed a similar agreement with Liberia. – U.S. President George W. Bush announced PSI on May 31, 2003, during a visit to Krakow, Poland. Its purpose is to establish cooperative partnerships with other countries to control the proliferation of weapons of mass destruction. Citation: U.S. Department of State Fact Sheet (May 12, 2004); M2 Presswire (May 13, 2004); The Washington Times, June 5, 2003, page A15.

U.S. and Australia sign free trade agreement. On May 18, 2004, the U.S. and Australia signed a landmark Free Trade Agreement (FTA) that will eliminate almost all tariffs on manufactured goods, as well as open each other’s markets for services and agricultural products. U.S. Trade Representative Robert B. Zoellick and Australian Minister of Trade Mark Vaile signed the FTA on behalf of their respective countries. – The U.S. has FTAs in place with Canada and Mexico (NAFTA), Chile, Jordan, Israel, and Singapore. Citation: U.S. Trade Representative press release 2004-42 (May 18, 2004); The Cairns Post/The Cairns Sun (Australia), May 20, 2004, page 16; the full text of the FTA is available on the website www.ustr.gov.