2004 International Law Update, Volume 10, Number 8 (August)

2004 International Law Update, Volume 10, Number 8 (August)

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

JUDGMENT ENFORCEMENT

In appeal of suit by United States against former wife of convicted American con man to register U.S. confiscation order in United Kingdom, House of Lords held that U.S. federal appellate court did not violate “interests of justice” under English law by dismissing her appeal of order under “fugitive disentitlement” doctrine

In 1984, the United States convicted Larry Barnette with defrauding the United States government of some $15 million arising from his operation of military laundries overseas. There were several counts of fraud and related offenses, including those under the Racketeer Influenced and Corrupt Organizations Act (RICO).

A district court sentenced him to a term of imprisonment. It also ordered Barnette to forfeit his shares in Old Dominion, S.A. (ODSA), a Panamanian company, which he controlled and which he had been using it to “launder” the proceeds of his fraudulent activity. Shortly before the grand jury had indicted him, Barnette had transferred 800 of his 900 shares in the company to his then wife, who is now Kathleen Conway Montgomery (appellant here).

In 1983, the appellant had left Barnette and married a man named Montgomery. She renounced her U.S. citizenship in April 1992 and became a London resident the following month. She then became a citizen of St. Kitts and Nevis in June 1994 and lost her U.S. nationality in November 1994.

The U.S. court ruled in 1984 that, under RICO, the government had gotten title to those shares before their transfer to the appellant. Thus Barnette had a duty either to hand them over or to specify their value. Barnette paid the U.S. $7,000,000, but failed to provide information about the market value of the shares. After long and complex litigation, the American court issued a confiscation order. After several judicial revisions (e.g, to include interest between 1985 and 1995), the final effect of these orders was to raise the total sum payable by the appellant and Barnette to $11,767,754, plus costs and expenses.

The two individuals had then appealed to the U.S. Court of Appeals for the Eleventh Circuit in which their attorney filed a substantial brief. That Court, however, had dismissed the appeal on the basis of the “fugitive disentitlement” doctrine. That is to say that the Court had exercised its discretion to decline to decide, or even to hear, the appeal on the ground that Barnette was a fugitive from justice.

The U.S. government next applied to register the confiscation order in the U.K., as the first step in enforcing it against the appellant’s U.K. assets. It is undisputed that the United States is a designated country, by virtue of the Criminal Justice Act 1988 (CJA) (Designated Countries and Territories) Order 1991. Moreover, under Section 97 of the CJA, the confiscation order made by the U.S. district court is an “external confiscation order,” which is in force and not subject to appeal. The single Section 97 issue between these parties is whether it would be “contrary to the interests of justice” to register the American order. In June 2002, the English High Court granted the application to register the order.

Appellant then took her case to the Court of Appeal (Civil Division). There she claimed that the confiscation order would implicate Articles 6 of the European Convention on Human Rights and Fundamental Freedoms (ECHR) and Article 1 of the First Protocol thereto. If the Convention were applicable to the United States, she urged, then the English courts would be violating Section 6 of the English Human Rights Act of 1998 (HRA) by registering the order. [By the HRA, Parliament had incorporated the ECHR into English domestic law.] The Court, however, dismissed her appeal. See 2003 International Law Update 113.

The appellant next succeeded in taking her case to the House of Lords. There she urged that the Eleventh Circuit had dealt unjustly with her. Hence the English court’s registration of the confiscation order under the CJA had the effect of supporting its terms and of opening her up to its unjust repercussions. This in turn brought Article 6 of the ECHR into play. The general standard of Article 6(1) is that: “In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.”

In the first place, according to appellant, the rulings below directly involved Article 6 because the English court had a duty to satisfy itself that the American proceedings qualified under the Article 6 guarantees. In addition to (or alternatively) she maintained that Article 6 was at least indirectly in play. By allowing the U.S. to register the confiscation order, she argued, the English court had exposed her to the impact of the American proceedings, which themselves failed to meet the criteria of Article 6. In an opinion by Lord Carswell in which the other four Lords of Appeal concur, however, the House dismisses her case.

“The fugitive entitlement doctrine is not an arbitrary deprivation of a party’s right to a hearing, but is intended to be a means of securing proper obedience to the orders of the court. [As one of the lower court Judges noted:] ‘Where a party is guilty of contempt there may be no other sanction available if he is outside the jurisdiction of the court. The reason for the doctrine being applied by the United States Court of Appeals in Mrs. Montgomery’s case was not to vindicate the dignity of the court, but because the court thought that it was the only available sanction which could achieve obedience to the order of the court.’”

“Although the application of the fugitive entitlement doctrine may be regarded as failing to secure all of the protection required by article 6 of the Convention, it is a rational approach which has commended itself to the Federal jurisdiction in the United States. As such it could not in my opinion be described by any stretch as a flagrant denial of the appellant’s article 6 rights or a fundamental breach of the requirements of that article. It follows that the appellant’s argument based on the indirect engagement of the responsibility of the United Kingdom must fail.” [¶ 29]

“The same reasons are relevant in considering the issue whether it was contrary to the interests of justice to enforce the confiscation order. ... [T]he appellant was by no means shut out from taking part in the [American] proceedings. The merits of her contentions had been fully considered at first instance and on appeal she filed a brief and was represented by counsel.”

“When the issue of fugitive disentitlement was raised by the [American] court, [appellant] was able to file a brief relating to this issue. Moreover, it seems to me a material consideration that the U.S. Court of Appeals found that she had been taking active steps to hide assets and transfer funds in an effort to evade the forfeiture judgment. I accordingly agree [with the lower courts] that it would not be contrary to the interests of justice to register the judgment.” [¶ 30]

Citation: Government of United States v. Montgomery (No 2), [2004] U.K.H.L. 37, [2004] All E.R. (D) 402 (House of Lords, July 22).

JUDICIAL ASSISTANCE

Second Circuit upholds discretionary denial of request from German litigants for production of documents under 28 U.S.C. Section 1782 though it complied with statutory requirements because granting discovery assistance would not, under circumstances, further goals of Section 1782

Michael Schmitz and 27 other German investors (hereinafter petitioners) filed a lawsuit in Germany against the German telecom company “Deutsche Telekom AG” (hereinafter DT) which the government owns in part. Petitioners claimed that the company had misled investors by overstating the value of its real estate assets. Similarly, American investors brought a parallel action in a New York federal court.

In January 2003, petitioners sought the production of evidence under 28 U.S.C. Section 1782 from the U.S. law firms involved in the U.S. action, particularly the documents that DT had already produced and handed over to those firms.

Section 1782(a) provides for judicial aid in obtaining evidence for foreign proceedings. It provides that “the district court ... may order [a person] to give his testimony or statements or to produce a document or other thing for use in a proceeding in a foreign or international tribunal ...” The district court first decided that petitioners met the statutory requirements of Section 1782. Nevertheless, it concluded that the request would run counter to the twin aims of the statute. These are [1] to provide efficient evidentiary assistance to international tribunals and litigants and [2] to encourage foreign countries to give similar aid to American courts.

Here, the German government opposed judicial assistance by the American court. The German Ministry of Justice and the Prosecutor in Bonn who were looking into DT’s affairs asked the district court to deny production. They asserted that it would jeopardize the ongoing German criminal investigation and impugn German sovereignty.

Furthermore, the Federal Ministry of Justice submitted that DT had made the documents available in the American action on condition that they be used exclusively for that action. Exercising its statutory discretion, the court denied the application for evidence and petitioners filed this appeal. The U.S. Court of Appeals for the Second Circuit affirms.

The Court first lays down the standard for granting such discovery requests. “We have held that a district court is authorized to grant a Section 1782 request where ‘(1) ... the person from whom discovery is sought reside[s] (or [is] found) in the district of the district court to which the application is made, (2) ... the discovery [is] for use in a proceeding before a foreign tribunal, and (3) ... the application [is] made by a foreign or international tribunal or ‘any interested person.’‘ [Cite] ‘Once the statutory requirements are met, a district court is free to grant discovery in its discretion.’ This discretion, however, is not boundless. Rather, we have held that district court have to exercise their discretion under Section 1782 in light of the twin aims of the statute.” [Slip op. 9-10]

The Court of Appeals decides that the district court did not abuse its discretion in this case. Technically, the respondents here from whom petitioners sought evidence were the U.S. law firms, but in reality the documents belonged to DT whom petitioners were suing in Germany.

“[W]e find no error in the court’s decision to deny, rather than merely limit, discovery. Although we have expressed a preference for narrowly tailored discovery orders where possible, ... the district court did not abuse its discretion in deciding that no such order was possible in this case. The German authorities objected to any disclosure of DT documents to petitioners at this time. ... Despite their protestations to the contrary, petitioners are thus not in the same position as the American plaintiffs.”

“The latter received access to the documents only because they were not involved in the German litigation and promised not to disclose the documents to anyone, including the German plaintiffs. ... But petitioners, themselves German plaintiffs, want the documents for use in their actions in Germany. It is hard to imagine a discovery order that could have effectively eliminated the concerns raised by the German authorities and fulfilled the aims of Section 1782.” [Slip op 13-15]

Citation: Schmitz v. Bernstein, Liebhard & Lifshitz, LLP, 376 F.3d 79 (2d Cir. 2004).

JURISDICTION (PRESCRIPTIVE)

Second Circuit dismisses claim for excessive service fees for EURO currency exchanges holding that Sherman Act does not reach foreign antitrust activity occurring within and outside United States that causes injury to foreign customer where that injury is independent of any injury to domestic customer

John Sniado alleged that he paid supra-competitive service fees to exchange EURO-zone currencies in European countries, which were the result of price-fixing conspiracies among European banks. He thereupon sued a variety of European banks in district court.

The district court dismissed the complaint under Section 6a of the Foreign Trade Antitrust Improvements Act of 1982 (FTAIA) [15 U.S.C. Section 6a, a 1982 amendment to the Sherman Act] because Sniado’s complaint alleged that the effect of the European conspiracy on U.S. gave rise to a claim, but not to his particular claim. The relevant language of the FTAIA reads, “Sections 1 to 7 of this title [the Sherman Act] shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations.” 15 U.S.C. Section 6a.

The U.S. Court of Appeals for the Second Circuit initially vacated the dismissal and remanded for further pretrial proceedings. The U.S. Supreme Court then decided F. Hoffmann-La Roche Ltd. v. Empagran S.A., 124 S.Ct. 2359 (2004). See 2004 International Law Update 83. It held that the Sherman Act does not reach foreign antitrust activity occurring within and outside United States that causes injury to a foreign customer where that injury is independent of any injury to a domestic U.S. customer. Thus, Section 6a(2) would require Sniado to allege that the European conspiracy’s effect on domestic commerce gave rise to his claim.

The Second Circuit now vacates and dismisses the appeal in light of Empagran for lack of subject matter jurisdiction. After Empagran changed the law in the Second Circuit, Sniado submitted an amended complaint in which he failed to allege that the currency exchange fees in the U.S. reached supra-competitive levels. Neither did he sufficiently allege a connection between the European conspiracy and the effect on U.S. commerce.

“[Sniado] urges us now, however, to infer from the general allegations in his amended complaint that ‘the domestic component’ of the alleged ‘world-wide conspiracy’ was ‘necessary ... for the conspiracy’s overall success.’ Thus, his alleged injury in Europe, i.e., payment of excessive fees, was dependent on the conspiracy’s effect on United States commerce.”

“However, such an inference, even if reasonable, is too conclusory to avert dismissal. Nor are we inclined at this juncture to remand for Sniado to re-amend his complaint to restate facts in support of this alternative theory.” [Slip op. 7-8]

Citation: Sniado v. Bank Austria AG, 2004 WL 1753473 (2d Cir. August 5).

SOVEREIGN IMMUNITY

In actions against South Korean banks, Second Circuit relies on U.S. Supreme Court’s ruling in Dole Food that required direct ownership of majority of shares by government and thus held that defendant banks were not instrumentalities of Korean state under FSIA

Gary Filler and Lawrence Perlman (Filler plaintiffs), as well as Janet and James Baker (Baker plaintiffs) sued various parties for alleged securities fraud. The Filler plaintiffs of the TRA Rights Trust are the successors-in-interest of Seagate Technology, Inc. (Seagate). They own the claims arising out of Seagate’s June 2000 acquisition of stock in the Belgian software company Lernhout & Hauspie Speech Products, N.V. (L/H). The Baker plaintiffs acquired L/H stock through a stock swap for their interest in another company.

It later surfaced that L/H may have overstated its earnings by reporting income from non-existent customers. The Securities and Exchange Commission (SEC) is investigating the matter, and Belgian police have arrested several suspects. As a result, the price of L/H stock fell by 95 percent.

Defendants, Hanvit Bank and Chohung Bank, are South Korean commercial banks that allegedly took part in the securities fraud by lying to their auditors about L/H’s revenue. Before 1999, they were private entities. Due to financial problems, however, they both received capital infusions through the Korean Deposit Insurance Corporation (KDIC). This is a Korean government institution created by Korea’s Depositor Protection Act and by presidential decree. When plaintiffs filed these actions, the KDIC owned 80 percent of Chohung Bank, and 100 percent of Hanvit Bank (but through a holding company).

The district court initially granted the banks immunity under the Foreign Sovereign Immunities Act (FSIA) [28 U.S.C. Sections 1602ff.] and dismissed the complaints. Soon afterwards, the Supreme Court held in Dole Food Co. v. Patrickson, 538 U.S. 468 (2003) that a foreign state itself must directly own a majority of a company’s shares for the latter to qualify as an instrumentality of the state under the FSIA. (See 2003 International Law Update 71).

The plaintiffs accordingly moved for reconsideration of the immunity issue. The district court later vacated its previous dismissals because the South Korean government owned the defendant banks only indirectly. Defendant banks appealed from the interlocutory orders of the district court finding that they were not entitled to sovereign immunity. The U.S. Court of Appeals for the Second Circuit affirms.

The Court reminds the parties that the FSIA is the sole basis for obtaining jurisdiction over a foreign state in U.S. courts. The definition of “foreign state” in 28 U.S.C. Section 1603 includes an “agency or instrumentality” that is a separate legal person, majority-owned by the foreign government, and not a citizen of the U.S. or created under the laws of a third country. The only issue here is whether the defendant banks are agencies or instrumentalities of the Korean government.

The defendant banks argued that once it is determined that KDIC is an organ of the Korean government, they automatically become agencies or instrumentalities by virtue of the KDIC majority ownership. The Court notes that this view would entitle an infinite number of entities to sovereign immunity.

“While Dole Food rejected the contention that Section 1603(b)(2)’s ‘majority ownership’ clause allowed for the tiering of corporate subsidiaries, such that each could avail itself of sovereign immunity under the FSIA, id at 473, the Banks advance a somewhat different argument in this case -- namely, that an ‘organ’ under the first half of Section 1603(b)(2) that is an ‘agency or instrumentality’ is also, by definition, a ‘foreign state’ under Section 1603(a), and that its subsidiary is therefore directly owned by a foreign state and entitled to sovereign immunity.”

“Accepting the Banks’ proposed distinction would, however, eviscerate Dole Food. Rather than claiming a subsidiary is entitled to immunity because of successive majority ownership up the chain of control, defendants would simply claim that at each level, majority ownership grants agency or instrumentality status, designation as a foreign state, and, therefore, sovereign immunity. Such a result would be incompatible with the purpose of the FSIA, which is to grant governmental, not private corporate immunity, and, in any event, would reflect infidelity to the Supreme Court’s reasoning in Dole Food.”

“The fact that Chohung is a second-tier subsidiary while Hanvit is a third-tier subsidiary only makes the problem more apparent because it requires an additional finding that Woori [the holding company] is an agency or instrumentality and therefore a foreign state, thus conferring immunity on Hanvit. Such a result is incompatible with Dole Food. The Supreme Court made it unmistakably clear that ‘a subsidiary of an instrumentality is not itself entitled to instrumentality status,’ Id at 473, and that ‘only direct ownership of a majority of shares by the foreign state satisfies the statutory requirement.’ Id. at 474 (emphasis added).” [Slip op. 14-15]

According to the Court, this interpretation best comports with the restrictive theory of sovereign immunity as codified in the FSIA. Finally, this decision does not undermine a public function of the Korean government because one of the defendant banks has already reverted to private ownership and the other is in the course of doing so.

Citation: Filler v. Hanvit Bank, 2004 WL 1764228 (2d Cir. August 6).

TAX CONVENTIONS

Ontario Federal Court of Appeal concludes that lower court erred in applying Canadian law of residence to Canadian born taxpayer who had lived and worked alternately in both Canada and United States over several years but who claimed United States residence for tax purposes under U.S. - Canada tax convention

Ms. Pamela Allchin (appellant or taxpayer) was born in Canada, and, in 1967, moved with her parents to Detroit, Michigan. At that time she obtained a green card. In 1969, she moved back to Windsor, Ontario but kept up her green card status by serving as a registered nurse in Michigan. She renewed her green card status every six months by virtue of part-time employment in Detroit, commuting from Windsor [Ontario] to work day shifts.

Appellant was also on the staff of a Windsor hospital from 1983. She resigned that position in April 1991, however, and began looking for a full time job in the United States. She then enrolled at a Michigan school to gain additional training. Starting in September 1992, and throughout the contested tax years, appellant worked in the hospital industry selling hospital supplies throughout the United States.

The record shows that appellant filed tax returns on her worldwide income in the U.S. as a U.S. resident. Concededly, her qualified tax advisor in the U.S. prepared her U.S. resident tax returns for those years, and filed them on the basis of her representations that she was a U.S. resident.

At some point, the Minister of National Revenue decided that appellant had not cut her ties with Canada. Thus, she had to report and pay tax on her worldwide income pursuant to the Canadian Income Tax Act , R.S.C. 1985, c. 1 (5th Supp.) (ITA) for the 1993, 1994 and 1995 tax years. [8] Taxpayer is now retired and resides in Windsor.

For the three taxation years at issue, appellant claimed to have been a resident of the U.S. and not subject to Canadian taxation under the ITA. In particular, she relied upon the provisions of the Canada‑ United States Tax Convention Act, 1984 (S.C., 1984, c. 20, Schedule I) (the “Treaty”). During those years, appellant held a “green card,” officially known as a Permanent Resident Card, which entitled her to permanently live and work in the U.S.

In July 2003, a Judge of the Tax Court of Canada ruled on the issue of appellant’s tax residence. The Judge reviewed the leading Canadian authority of Thomson v. Minister of National Revenue, 2 D.T.C. 812 (S.C.C. 1945) as well as the evidence presented. In his view, there was not “sufficient permanency” in taxpayer’s links to the U.S. to sever her residential ties to Canada. From this, the Judge reasoned that Article IV(2) of the Treaty, dealing with dual residency (the “tie‑breaking” provisions), did not apply.

Taxpayer appealed that decision. The Federal Court of Appeal at Toronto, Ontario unanimously agrees to allow the appeal.

Before the Court, appellant contended that the Judge below erred as a matter of law in assuming that the Canadian common law test of “ordinarily resident” as laid down in the Thomson case is the proper test to ascertain United States residency. Specifically, she urged that the “severing ties” analysis be used only to determine when Canadian residence ends and not when deciding when residence begins elsewhere. In effect, the Judge below misunderstood the concept of “dual residency.”

The appellate Court agrees and then explains the scope of review in cases like this. “The Supreme Court of Canada has set forth the standard of review to be applied by the lower federal Courts in reviewing decisions of the Tax Court of Canada. For questions of law, the de novo standard is correctness. On the other hand, for findings of fact, inferences or conclusions of fact and conclusions of mixed fact and law, the standard is ‘palpable and overriding’ error. There is, however, an exception as to conclusions of mixed fact and law: if a reviewing court can separate a clear legal error from the facts, the appellate court will apply the correctness standard.” [¶ 11]

“It is well established that a tax treaty is to be given a liberal interpretation with a view to implementing the true intention of the parties. Literal or legalistic interpretations which defeat its basic objectives are to be avoided [Cites]. “... [T]he Supreme Court of Canada [has] noted that the Treaty was intended to benefit Canadians working in the United States or vice versa, by protecting them from double taxation. An ancillary goal was also said to be the mitigation of administrative problems in having to file simultaneously tax returns in two uncoordinated tax systems.” [¶ 12]

The Court assents substantially to appellant’s account of how the lower court reasoned. “In my analysis, this is an erroneous approach. The learned Judge failed to consider that Ms. Allchin might be a dual resident, which concept necessarily involves the possibility of residency being established in the United States without having severed ties to Canada. Having found that Ms. Allchin was resident in Canada, pursuant to the Thomson approach, the Judge should have examined whether she was also resident in the United States for the purposes of the Treaty [Cite].”

“The Judge [below] erroneously ignored the fact that, as a green card holder, Ms. Allchin was required to pay tax in the United States regardless of her physical residence. Green card status is a ‘criterion of a nature’ similar to United States residence so as to bring Ms. Allchin within the definition of ‘Resident of a Contracting State’ under Article IV(1). In turn, the Judge’s factual findings establishing Canadian residency under the Thomson analysis gives rise to dual residency and the need for a liberal analysis under the tie‑breaking provisions of Article IV(2). The failure to conduct the analysis provided by the Treaty is clearly a legal error.” [¶¶ 14-15]

“While technical explanations attached to treaties are not binding on the Court, they may be accepted as valid guidance [Cite] In this case, the following commentary on Article IV(2) concerning the definition of ‘residence’ and the use of the tie‑breaking provisions is germane: ‘As regards the concept of home, it should be observed that any form of home may be taken into account (house or apartment belonging to, or rented by, the individual, rented furnished room). But the permanence of the home is essential; this means that the individual arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay which, owing to the reasons for it, is necessarily of short duration (travel for pleasure, business travel, educational travel, attending a course at school, etc.”

“The appeal should be allowed, the decision of the Tax Court of Canada, dated July 14, 2003 should be set aside and the matter referred back to a judge of the Tax Court of Canada for redetermination. The parties should be permitted to call additional evidence if they choose. Ms. Allchin’s costs on appeal and in the Tax Court of Canada should be set at $ 12,000 inclusive of disbursements and G.S.T.” [¶¶ 16-17]

Citation: Allchin v. Canada, [2004] F.C.J. No. 942; 2004 F.C.A. 206 (Fed.Ct.App. May 27).

TRADE

To improve marine safety and prevent marine pollution, United States and European Union agree on mutual recognition of technical conformity for marine equipment

On February 27, 2004, the EU signed the Agreement between the European Community and the United States of America on the mutual recognition of certificates of conformity for marine equipment. The U.S. and the EU have decided that “mutual recognition” procedures will facilitate trade in technical equipment. The way it works is that recognized bodies in the exporting country certify the marine product’s compliance with the importing country’s regulatory and technical requirements.

The Agreement lays down the conditions under which the importing party’s regulatory authority is to accept the certificates of conformity issued by the exporting party’s conformity assessment bodies. Essentially, the technical requirements in both the U.S. and EU are presumed to be equivalent. Further, it provides a framework for regulatory cooperation between the U.S. and the EU for marine equipment. See Articles 2 and 4 of the Agreement.

Each party designates the qualified conformity assessment bodies (laboratories) that are qualified to review the technical conformity of the products to be traded (Article 6). To ensure proper functioning of the Agreement, the parties established a Joint Committee which will meet periodically and which may also set up Joint Working Groups (Article 7).

In Annex II, the Agreement lists the covered maritime products and it will be periodically updated. It contains products such as Lifebuoy self-activating smoke signals, line-throwing appliances, liferafts, magnetic compasses, echo-sounding equipment and rate-of-turn indicators.

The EU has designated a regulatory agency in each of the EU Member States. For example, in the United Kingdom it is the Maritime and Coastguard Agency in Southampton. The relevant Commission Directorate is the Directorate General for Energy and Transport, Maritime Safety Unit. In the U.S., it is the U.S. Coast Guard, Office of Design and Engineering Standards (G-MS).

The underlying laws and regulations are Council Directive 96/98/E.C. of 20 December 1996 for the EU, and 46 U.S.C. Section 3306 and 46 C.F.R. Parts 159 to 165 for the U.S. The text of the Agreement is attached to the corrected Council Decision 2004/425/E.C. It entered into force on July 1, 2004.

Citation: Corrigendum to Council Decision 2004/425/E.C. of 21 April 2004 on conclusion of Agreement between European Community and United States of America on mutual recognition of certificates of conformity for marine equipment, 2004 O.J. of European Union (L 185) 18, 24 May 2004 (corrected Council Decision and text of Agreement) & (L 234) 9, 3 July 2004 (notice of entry into force).

TRADEMARKS

In trade mark application by Procter & Gamble, European Court of Justice upholds lower court’s ruling that geometric shapes and patterns of applicant’s detergent tablets lacked degree of distinctiveness that would inform typical European consumers as to identity of manufacturer

In October 1998, Procter & Gamble Company of Ohio (P/G) applied to the E.C.’s Office for Harmonisation in the Internal Market (Trade Marks and Designs) (OHIM) to register two detergents in tablet form as distinctive Community trade marks. The tablets are three‑dimensional in shape, one square and the other rectangular, with “chamfered” edges, beveled or slightly rounded corners, and with speckles and inlays on the upper surfaces. In March 2000, the OHIM declined to register the detergents as Community trade marks.

When P/G had gone to the Court of First Instance (CFI), it had partially dismissed P/G’s actions for annulment of the OHIM decisions of March 2000. The CFI pointed out that Article 7(1)(b) of Regulation No. 40/94 provides that trade marks that lack any distinctive character do not qualify for registration.

The CFI noted that the mark does not have to convey exact information about the identity of the product’s manufacturer or the supplier of the services. It need only make it possible for members of the public concerned [1] to distinguish the product or service that it designates from those which have a different trade origin, [2] to conclude that all the products or services that it designates have been made, sold or supplied under the control of the mark’s owner and [3] to rest assured that the owner is accountable for their quality.

“The three‑dimensional shape for which registration has been sought ... is one of the basic geometrical shapes and is an obvious one for a product intended for use in washing machines or dishwashers. The slightly rounded corners of the tablet are dictated by practical considerations and are not likely to be perceived by the average consumer as a distinctive feature of the shape claimed, capable of distinguishing it from other washing machine or dishwasher tablets. Likewise, the chamfered edges are a barely perceptible variant on the basic shape and have no impact on the overall impression made by the tablet.”

“As regards the presence of speckles and a darker triangular inlay in the centre of the tablet, ... [the Board] remarked, when dealing with the ... inlay, that the use of different colours was commonplace for the goods in question ... That statement demonstrates that the Board of Appeal took the view that the speckles were not capable of rendering the mark applied for distinctive, since what was involved was a commonplace feature. The contested decision is therefore sufficiently reasoned in that regard.” [¶¶ 56-57 CFI]

Given the overall impression created by the combination of the shape and pattern of the tablet in question, the mark applied for does not enable consumers to distinguish the products concerned from those having a different trade origin when they come to select a product for purchase.” [¶ 63 CFI] Therefore, the CFI partially dismissed the actions brought by P/G against the contested decisions.

By applications lodged at the Registry of the European Court of Justice (ECJ) in December 2001, P/G appealed under Article 49 of the E.C. Statute of the Court of Justice against the two adverse CFI judgments. In support of its appeals, P/G maintained that the CFI made an error of law in its reading of Article 7(1)(b) of Regulation No 40/94.

Preliminarily, the ECJ (Sixth Chamber) summarizes applicable E.C. law. It first notes that [P/G’s] single plea in law has three main points of analysis: [1] the distinctive character of the trade marks for which registration is sought; [2] the need to consider the trade mark as a whole; and [3] the assessment of the average consumer’s level of attention.

Under Article 4 of Regulation No 40/94, the Court notes, a Community trade mark may consist of any signs capable of being represented graphically, along as such signs can distinguish the products or services of one undertaking from those of other undertakings.

Article 4 is clear that both a product’s shape and its colors fall among the signs which may constitute a Community trade mark. Therefore, as a matter of principle, a sign consisting of the three‑dimensional shape of a square or rectangular tablet for washing machines or dishwashers, with chamfered edges, beveled or slightly rounded corners, speckles and an inlay on the upper surface may qualify as a trade mark, provided that it meets the conditions mentioned above.

The ECJ, however, determines that P/G’s appeal is unfounded and dismisses it. “For a trade mark to possess distinctive character for the purposes of Article 7(1)(b) of Regulation No 40/94, it must serve to identify the product in respect of which registration is applied for as originating from a particular undertaking, and thus to distinguish that product from those of other undertakings.” [¶ 32]

“That distinctive character must be assessed, first, by reference to the products or services in respect of which registration has been applied for and, second, by reference to the perception of them by the relevant public, which consists of average consumers of the products or services in question, who are reasonably well informed and reasonably observant and circumspect [Cites].” [¶¶ 32-33]

The CFI properly assessed whether the trade marks at issue had any distinctive character in line with settled ECJ case‑law. It focused on two reference points. First, it compared the products to the products or services with respect to which their registration was sought. Second, it took into account the perception of the relevant public, which consists here of all consumers. In holding that P/G’s trade marks for which it sought registration are barren of any distinctive character for the purposes of Article 7(1)(b), the CFI did not make an error of law.

“Average consumers are not in the habit of making assumptions about the origin of products on the basis of their shape or the shape of their packaging in the absence of any graphic or word element and it could therefore prove more difficult to establish distinctiveness in relation to such a three‑dimensional mark than in relation to a word or figurative mark.”

“The actual application by the [CFI] of those criteria to these cases involves findings of a factual nature. The [CFI] has exclusive jurisdiction to make findings of fact, save where a substantive inaccuracy in its findings is attributable to the documents submitted to it, and to appraise those facts. That appraisal thus does not, save where the clear sense of the evidence produced to it has been distorted, constitute a point of law which is subject, as such, to review by the [ECJ] on appeal. In this instance, there is nothing in the findings made by the [CFI] to suggest that the evidence produced to it was distorted.” [¶¶ 38-39]

“That does not mean, however, that the competent authority, ... may not first examine each of the individual features of the get‑up of that mark in turn. It may be useful, in the course of the competent authority’s overall assessment, to examine each of the components of which the trade mark concerned is composed.”

“In this instance, the [CFI], having examined each of those components separately, then assessed ... the overall impression deriving from the shape and other component features of the tablets concerned, as described ... above, in the way required by [our] case‑law ... .”

“It follows that there is nothing in the judgments under appeal to suggest that the [CFI] failed to base its assessment of the distinctive character of the trade marks for which registration is sought on the overall impression which they produce. Therefore, the second part of the plea, which relates to the need to consider the trade mark as a whole, must be rejected.” [¶¶ 45-48]

The ECJ concludes by commenting on the consumer-attention factor. “On this point, the [CFI’s] finding [above] ... that, since washing machine and dishwasher tablets are everyday consumer products, the level of attention paid by the average consumer to their shape and pattern is not high is a finding of fact, which ... is not subject to review by the Court of Justice on appeal where, as in this instance, it does not entail a distortion of the factual evidence produced to the [CFI].” [¶ 53]

Citation: Procter & Gamble Co. v. Office for Harmonisation in the Internal Market (Trade Marks and Designs), Joined cases C-473/01 and C-474/01 P., 2004 E.C.J. Celex Lexis 163 [E.C.J. (6th Cham.), April 29].

WAR REPARATIONS

In action seeking compensation for destruction of factory in Sudan allegedly associated with Osama bin Laden terrorist network, Federal Circuit confirms that Constitution grants President considerable power to designate enemy property abroad outside limits of Takings Clause

Sabah El Din Ahmed Mohammed Idris (Idris) is a Saudi banker living in Sudan. In 1998, Idris acquired shares in a Sudanese pharmaceutical company, El-Shifa Pharmaceutical Industries Company (hereinafter El-Shifa), located in Khartoum, Sudan. After the August 7, 1998, attacks on U.S. embassies in Nairobi, Kenya, and Dar es Salaam, Tanzania, by terrorists, U.S. President Clinton ordered U.S. forces to conduct military strikes in Afghanistan and Sudan to disrupt the terrorist network of Osama bin Ladin. The targets included El-Shifa that was allegedly producing an ingredient for nerve gas.

El-Shifa and Idris sought $50 million in damages in the U.S. Court of Federal Claims, arguing that the destruction of the factory constituted a taking of private property for public use within the meaning of the Fifth Amendment to the U.S. Constitution. The Court of Federal Claims entered judgment in favor of the United States, and this appeal resulted. The U.S. Court of Appeals for the Federal Circuit affirms.

The Court first reviews the Government’s three original arguments for dismissal of the complaint. First, the Government argued that the Takings Clause does not apply to property owned by non-resident aliens outside the U.S. This claim, however, presents a non-justiciable “political question.” The Court disagrees.

Second, the Court sees no merit in the Government’s argument that the Court of Federal Claims lacked jurisdiction because this is a tort action alleging that the U.S. President acted negligently in ordering the destruction of the factory. Instead, the Court reads the complaint as alleging a taking. The claim of possible tortious acts by the U.S. does not deprive the Court of jurisdiction.

Third, the Government contended that 28 U.S.C. Section 2502 (the Reciprocity Act) requires plaintiffs in the Court of Federal Claims to show that their home country treats their own nationals and U.S. citizens equally when they bring claims against that government. According to the Government, that is not the case in Sudan. The Court of Federal Claims had heard evidence that U.S. citizens are on equal terms with Sudanese citizens in actions against the Sudanese Government. The fact that, in 1999, the Sudanese government had suspended a clause of the Sudanese Constitution guaranteeing “all people” equal access to the courts does not change this fact.

The Court then turns to the Government’s new argument that the Takings Clause does not reach the type of Executive conduct that led to the destruction of the El-Shifa factory. “... [I]t is... true that the government does not avoid the Takings Clause by simply using its military forces as cover for activities that would otherwise be actionable if performed by one of its civilian agencies.”

“Military conduct that does not touch on the destruction or appropriation of enemy property can sometimes give rise to a valid takings claim. ... In such cases, the military merely carries out the sovereign’s eminent domain prerogative which, under our Constitution, the United States may not exercise without providing just compensation.”

“Thus, military takings cases often ask courts to ascertain the precise point at which the military conduct complained of is no longer coextensive with the state’s civil power of eminent domain, but rather, enters the zone of conduct, outside the reach of the Takings Clause, where the United States appropriates the property of its enemies. ...” [Slip op. 23-24]

More directly, the issue here is whether the President has the inherent power to designate the private property of an alien abroad as enemy property. Whatever power the President may have in this regard must emanate from the U.S. Constitution. The Executive Powers in the Constitution include the faithful execution of the laws, the power to wage war, and the command of military forces.

“In our view, the President’s power to wage war must also necessarily include the power to make extraterritorial enemy property designations because such designations are also an important incident to the conduct of war. As much is borne out of the history of this nation’s many declared and undeclared wars, part of which is documented in the cases where courts have applied the enemy property doctrine. The cases teach that the purpose of such designations is almost always to ‘repel and defeat the enemy’ by diminishing the sum of material resources that it has at its disposal to prosecute hostilities against the United States and its citizens.”

“Whether the private property destroyed as enemy property is a tank firing rounds at American forces, a bridge the enemy finds necessary to advance to the front, or a commodity, such as oil, imperiled by advancing forces, the aim is the same – to ‘wage war successfully.’ ... We cannot envision how a military commander, much less the Commander-in-Chief, could wage war successfully if he did not have the inherent power to decide what targets, i.e., property, belonged to the enemy and could therefore be destroyed free from takings liability.” [Slip op. 48-49]

After reviewing separation of powers principles, the Court concludes “that the appellants may not seek judicial review of the President’s designation of the [Sudanese] Plant as enemy property. The appellants’ theory of takings liability centers on the alleged inaccuracy of the President’s designation of the Plant as enemy property. This must be the case, because as we noted above, if the Plant was in fact the property of al-Qaeda, the appellants would have no claim in takings against the United States for its destruction.”

“In essence then, the appellants are contending that the President failed to assure himself with a sufficient degree of certainty that the Plant was in fact a chemical weapons factory, despite his declaration to the contrary that the information he possessed in 1998 indicated al-Qaeda was using it to manufacture chemical weapons ingredients. The appellants would have the Court of Federal Claims in the first instance, and this court on appeal, provide them with an opportunity to test that contention, and in the process, require this court to elucidate the constitutional standards that are to guide a President when he evaluates the veracity of military intelligence.”

“We are of the opinion that the federal courts have no role in setting even minimal standards by which the President, or his commanders, are to measure the veracity of intelligence gathered with the aim of determining which assets, located beyond the shores of the United States, belong to the Nation’s friends and which belong to its enemies. In our view, the Constitution envisions that the political branches, directly accountable to the People, will adopt and promulgate measures designed to ensure that the President makes the right decision when, pursuant to his role as Commander-in-Chief, he orders the military to destroy private property in the course of exercising his power to wage war.”

“Today, we need not decide whether and to what extent the Executive and Legislative branches share that responsibility. We conclude only that the Constitution does not contemplate or support the type of supervision over the President’s extraterritorial enemy property designations the appellants request in this case.”

“The circumstances here, under which the Plant was targeted and destroyed, strengthen this conclusion. When the President ordered the Plant destroyed, he exercised the ‘authority ... the Constitution itself gives the Commander in Chief, to direct the performance of those functions which may constitutionally be performed by the military arm of the nation in time of war.’ Ex parte Quirin, 317 U.S. at 28.”

“In 1998, the President determined that the Plant’s destruction was a necessary and proper response to ‘the imminent threat of further terrorist attacks against U.S. personnel and facilities.’ ... In his radio address following the strike on the Plant, he maintained that he had ‘convincing’ evidence that the ‘bin Laden network of radical groups,’ was responsible for the then recent attacks on United States embassies in Kenya and Tanzania as well as ‘compelling evidence that the bin Laden network was poised to strike at [the United States] again.’ President’s Radio Address, 2 Pub. Papers (Aug. 22, 1998).”

“Under these conditions, where the President’s own assessment of the offensive posture of the Nation’s enemies overseas leads him to conclude that the Nation is at risk of imminent attack, we cannot find in the Constitution any support for judicial supervision over the process by which the President assures himself that he has in fact targeted that part of the enemy’s wealth of property that he thinks, if it were destroyed, would most effectively neutralize the possibility of attack.” [Slip op. 53-55]

Citation: El-Shifa Pharm. Inds. Co. v. United States, 2004 WL 1780921 (Fed. Cir. Aug. 11).

WORLD TRADE ORGANIZATION

WTO Appellate Body largely upholds Panel Report in U.S.-Canada dispute over final anti-dumping determinations on Canadian softwood lumber, rejecting majority of U.S. positions

The Appellate Body of the World Trade Organization (WTO) has issued its report in the U.S.-Canadian dispute over U.S. antidumping determinations regarding Canadian softwood lumber (DS/264). The dispute developed out of the anti-dumping investigation of the U.S. Department of Commerce (DOC) that began in April 2001. The DOC limited its investigation to the six largest Canadian exporters, and in April 2002 published its final anti-dumping duty order imposing duties of between 2.18 and 12.44 percent.

A WTO Panel had released its report in April 2004. See 2004 International Law Update 59. The Appellate Body (AB) upholds the Panel’s finding that the U.S. action did not square with Article 2.4.2 of the Agreement in determining the existence of dumping margins based on a “zeroing” methodology, that is, adjusting to zero value the negative margins in the investigation. Also, the AB reverses the Panel’s finding that the U.S. did not act inconsistently with Articles 2.2, 2.2.1, 2.2.1.1, and 2.4 of the Agreement when it figured out the amount of financial expense for softwood lumber from Abitibi Lake region. On the other hand, it declines to make its own findings on whether the U.S. had or had not acted at variance with these provisions.

Citation: United States - Final Dumping Determination on Softwood Lumber from Canada (AB-2004-2) (WT/DS264/AB/R) (11 August 2004). [Report is available on WTO website at www.wto.org.]

Libya agrees to compensate for 1986 Berlin nightclub bombing. On August 10, the State of Libya has consented to compensate more than 160 victims of the 1986 bombing of “La Belle,” a West Berlin nightclub and disco, a favorite of U.S. soldiers. The blast killed two American soldiers and a Turkish woman and injured over 200 persons. In 2001, a German court found that the Libyan secret service had engineered the scheme and convicted four individuals -- including a former Libyan diplomat. According to the Libyan ambassador to Germany and the German government, the amount to go to non-U.S. citizens would add up to $35 million. German lawyers worked out the arrangements with members of Muammar Gaddafi’s charitable foundation. Separate litigation is going on in the U.S. over the losses or injuries to Americans. Citation: Reuters News Service (via Findlaw), Berlin, Tuesday, August 10, 2004 (byline of Moritz Doebler).

Highest Israeli Court strikes down ban on Palestinian journalists. On April 25, 2004, an Israeli Supreme Court panel had invalidated a policy by the Israeli government dating back to September 2000 to deny press cards to Palestinian journalists working for foreign media even though they pass security checks and have permits to work in Israel. To cover events that involve the prime minister and other senior officials and to get inside official buildings such as the Parliament and the foreign ministry, a journalist must have a press card. After an enlarged seven-judge panel reheard the case, it also ruled against the government on August 5 last. It rejected the government’s explanation that some of these journalist are subversives and that the coverage of most of them is biased against Israel. Citation: Associated Press (online), Jerusalem, Thursday, August 5, 2004, 16:55:01 G.M.T. (byline of Laurie Copans).

New Protocol approved by Council of Europe. On Thursday, May 13, 2004, the Council of Europe adopted Protocol No. 14 (Pro. 14) to the European Convention on Human Rights and Fundamental Freedoms (ECHR). One of its main purposes is to improve the productivity of the European Court of Human Rights (ECtHR) at Strasbourg. First, it seeks to improve the Court’s ability to spot the inadmissible cases early on. To do this, it would authorize a single judge (rather than the present three-judge committee) to make this determination. Pro. 14 also lays down a new test of admissibility. It enables the Court to hold an application inadmissible when it decides that the applicant has not endured a major detriment from a rights violation [1] unless “respect for human rights” dictates that the Court has to look into the merits or [2] if the applicant lacks any remedy in his or her domestic courts. Pro. 14 would also help the Committee of Ministers in its task of overseeing the execution of the Court’s judgments by the offending State. If that State has failed to carry out a judgment, the Committee will need only a two‑thirds majority to bring an enforcement action before the Court. Additionally, the Protocol will extend the length of the judges’ elective terms from six to nine years. Finally, the Protocol features an article that attempts to deal with some thorny issues that may arise if the European Union wishes to accede to the ECHR. Citation: I.L.I.B, July 9, 2004 (publication of A.S.I.L.).