Legal Analyses written by Mike Meier,
Attorney at Law. Copyright 2017 Mike Meier. www.internationallawinfo.com.
1999
International Law Update, Volume 5, Number 10 (October).
ADMIRALTY
In
admiralty litigation over damage to ocean cargo, Second Circuit upholds
district court order to maintain security fund established for U.S. concursus
action to satisfy judgments resulting from foreign litigation
In
January 1996, a North Atlantic storm interrupted the voyage of the M/V Amphion
when it was five hundred miles off the coast of Canada. The crew abandoned ship
and rescue parties picked them up from the sea. The owners eventually recovered
the Amphion and her cargo of steel. (Incidentally, a few months later, the
vessel ran aground in India and was declared a total loss).
The
cargo consignees discovered that sea water had damaged the steel and separately
sued the vessel's owner, Kreta Shipping, S.A. ("Kreta"), in U.S.
district court. Kreta, in turn, brought this action in U.S. district court
pursuant to the Limitation on Liability Act (46 U.S.C. Section 181). Pursuant
to that statute, Kreta posted security equal to the maximum potential liability
(here: $3.38 million) and the court issued a "concursus" injunction
that barred any claimant from prosecuting claims related to the incident in any
other forum.
The
Act allows shipowners, upon receipt of a claim notice and upon posting a
security fund, to petition a U.S. district court for limitation of its
potential liability to an amount equal to the value of the owner's interest in
the vessel plus the value of the vessel's cargo. Sitting in admiralty without a
jury, the federal court then holds a "concursus" proceeding. In it,
the court determines whether there was negligence, whether the owner was aware
of the negligence, and how it should apportion the security fund among the
claimants.
The
insurer Nordstern Allgemeine Versicherungs AG ("Nordstern") became
subrogated to the rights of several cargo claimants and moved the district
court to lift the injunction. Nordstern wished to pursue its claims in a
foreign forum while preserving its right to receive monies from the U.S.
limitation fund to satisfy any judgment it might obtain.
Nordstern
then filed suit in Sweden attaching Kreta's hull insurance policy in the amount
of $3.5 million. The U.S. district court, however, ordered Nordstern to elect
between the U.S. and the Swedish action.
Nordstern
instead sued in Antwerp, Belgium. This was to avoid the $500 per-package
liability limitation of the American "Carriage of Goods by Sea Act"
(COGSA) (46 U.S.C. Section 1304). COGSA limits the damages in such a case to
$500 per cargo package regardless of the actual value. The 1924 Hague-Visby
rules (which the U.S. did not adopt) allow for higher per-package damages.
The
U.S. district court later vacated the concursus injunction but maintained the
limitation fund as a security against which a party could enforce any foreign
judgment. Kreta appealed. The U.S. Court of Appeals for the Second Circuit
remands to have the district court modify its order.
The
first question is whether the district court had mistakenly lifted the
injunction. Even though the statute itself does not mention parallel
litigation, precedent has established that the court must withdraw a concursus
injunction where the value of the limitation fund is more than the total value
of all claims or where there is only one claim.
The
Circuit Court finds that lifting the injunction (and thus permitting foreign
proceedings) did not deprive Kreta of any benefits under the Limitation Act.
Kreta will probably lose its rights under COGSA and there may be different
proceedings. The Limitation Act, however, is not subject to any doctrine of
forum non conveniens and does not let shipowners fix the applicable substantive
law.
The
Court acknowledges Kreta's concern that the foreign forum may not protect its
limitation rights. A signed stipulation binding all claimants to restrict the
recovery to the value of the limitation fund is usually enough.
On
the other hand, "where, as here, the claimant is a foreign entity wishing
to pursue its rights in a foreign forum, there is some question whether such a
stipulation will prove wholly effective in practice. We perceive the risk, for
example, that Nordstern may recover in a Belgian court an amount in excess of
that to which it stipulated, and then seek to execute the resulting judgment
fully upon the shipowner's assets in the foreign forum."
"This
concern may be ameliorated in the present case. Counsel for Nordstern
represented at oral argument before us that his client ‘will stipulate that the
claim in Antwerp will be exactly the same as the stipulated claim here.' ... We
therefore remand for the district court, through any combination of order,
stipulation, retention of jurisdiction, or other powers at its disposal, to ensure
that the terms and import of those stipulations and representations are binding
on Nordstern." [Slip Op. 29-30].
The
second question is whether the district court erred in preserving Nordstern's access to the
limitation fund. The Circuit Court sees nothing wrong with safeguarding the
fund to pay judgments gained in other courts. Kreta, however, had to put up
security of $3.5 million in the foreign forum. The Court therefore instructs
the district court to retain Nordstern's access to the fund by ordering
Nordstern to give up all the security it holds in foreign fora.
Citation:
Kreta Shipping, S.A. v. Preussag Int'l Steel Corp., No. 98-7899 (2d Cir.
September 13, 1999).
ADMIRALTY
In
defamation action against Watergate conspirator for speech on high seas that
linked plaintiff to "call girl" ring, Fourth Circuit holds that
federal admiralty law controls rather than law of plaintiff's domicile
The
scandals that arose out of the June 17, 1972 burglary of the Watergate
headquarters of the Democratic National Committee (DNC) implicated, among many
others, G. Gordon Liddy, then counsel for the Committee to Re-elect the
President. Liddy declined to plead guilty to conspiracy, wire tapping and other
charges.
After
a trial on the merits in the courtroom of Judge John J. Sirica, the jury
convicted Liddy and he actually served a little over four years in prison.
Since that time Liddy has been a radio talk-show host, author and frequenter of
the speech and lecture circuit.
Over
the years, authors have suggested several motivations for the historic burglary
and coverup that drove President Nixon to resign from office. One of these
theories was that John Dean, legal counsel to President Nixon, had learned that
his fiance's name appeared in a call-girl address book.
Dean
allegedly ordered the burglary, not to repair a previously installed listening
device, but to find out whether the DNC had a compromising photograph of his
fiance in the locked desk of a secretary named Ida Maxwell Wells. It would have
been one of several photographs of call girls that the DNC staff was using to
"entertain" out-of-town male guests.
Liddy
came to accept this explanation of the break-in and would sometimes refer to it
in speeches and lectures or in answers to questions. One of the three speeches
that Ida Wells made the subject of her defamation suit against Liddy took place
on the high seas during a seven-day Mediterranean cruise in August 1997.
Wells
filed her diversity defamation suit in Maryland federal court, seeking several
millions of dollars in compensatory and punitive damages. The gist of her
complaint was that Liddy publicly stated that plaintiff had been acting as a
procurer of prostitutes for male visitors to the DNC.
After
a contentious period of discovery, defendant moved for summary judgment. In its
opinion granting judgment to defendant, the district court applied Maryland's
lex loci delicti approach to choice-of-law. Since Louisiana was plaintiff's
domicile, the court held that its tort law should govern all of the defamation
claims. As to Liddy's speech on the high seas, the court concluded that, under
Louisiana law, the statements about plaintiff were not capable of defamatory
meaning.
Plaintiff
appealed the adverse judgment, contending, inter alia, that federal admiralty
law, not state law, governs the speech on the high seas. The U.S. Court of
Appeals for the Fourth Circuit agrees and reverses on this and other grounds.
"The
district court's application of Louisiana law to a case of defamation at sea
was incorrect. ... In this case, the alleged defamation of Wells occurred when
Liddy delivered a speech on a ship sailing on the high seas. Hence, the
governing law is not the common law of any single state, but rather is the
general maritime law as interpreted and applied by the courts of the United
States. (Cits.) " [524]
The
Court then finds some difficulty in determining the content of admiralty
defamation law. "After a thorough review, it appears that there is no
well-developed body of general maritime law of defamation. In such a situation,
it is clear that the general maritime law may be supplemented by either state
law, (cit.) or more general common law principles (cits.)."
"Application
of a single state's defamation law would 'impair the uniformity and simplicity
which is a basic principle of the federal admiralty law.' (Cit.) Accordingly, we determine that the common law
as compiled in the Restatement (Second) of Torts should control our evaluation
of Wells's claim of shipboard defamation." [id.]
In
the Court's view, a statement that embroiled Wells in prostitution activities
"tends so to harm [her] reputation ... as to lower h[er] in the estimation
of the community or to deter third persons from associating or dealing with
h[er]." Restatement (Second) of
Torts Section 559. Defendant's deposition testimony supports the conclusion
that he made statements during the cruise ship speech that met the legal test
for defamatory meaning. The jury will have to decide the other elements of
plaintiff's cause of action.
Citation:
Wells v. Liddy, 186 F.3d 505 (4th Cir. 1999).
ALIENS
In
job bias case brought against U.S. company by foreign national employed abroad,
Fourth Circuit holds that neither Title VII nor ADEA grants rights to aliens
not qualified to work in U.S.
Between
1979 and his termination in 1997, Rashid M. Chaudhry worked for Mobil Oil
Corporation in London and in Qatar. Chaudhry is a 53-year-old Canadian citizen
of Pakistani origin and Muslim faith.
Toward
the end of this period, Chaudhry filed several complaints claiming that Mobil
was discriminating against him. Mobil also rejected Chaudhry's request for
transfer to the U.S. When Mobil fired Chaudhry, he alleged that this was
retaliatory for his prior complaints.
In
December 1997, Chaudhry sued Mobil in Virginia federal court under Title VII,
the ADEA and Virginia law. Early the following year, Mobil moved to dismiss the
complaint for failure to state a claim upon which the court could grant relief.
Mobil contended that plaintiff was not qualified for employment in the U.S.
After
the district court granted the motion, Chaudhry appealed. The U.S. Court of
Appeals for the Fourth Circuit affirms. To come within the protection of Title
VII, it rules, the plaintiff has to show that he was qualified for U.S.
employment.
"A
foreign national is qualified for employment if 'the applicant was an alien
authorized for employment in the United States at the time in question.' The Immigration Reform and Control Act of
1986 requires that an alien obtain specific documentation to become authorized
for employment in the United States. See 8 U.S.C.A. Section 1324a(b) (West
1999)."
"During
oral argument, Chaudhry conceded that he did not have the specific
documentation required to become authorized for employment in the United States
at the time when he alleged Mobil discriminated against him. Chaudhry,
therefore, was not qualified for employment and is ineligible for Title VII
protection. Since the ADEA also requires that a plaintiff be qualified for
employment, Chaudhry is also ineligible for ADEA protection." [504-505]
Citation:
Chaudhry v. Mobil Oil Corp., 186 F.3d 502 (4th Cir. 1999).
CHILD
ABDUCTION
In
Hague Child Abduction Convention case, Irish Supreme Court rules that unmarried
Irish mother of child by unmarried Egyptian father did not, under
circumstances, violate father's Convention rights by taking child from New York
to her home in Ireland
In July
1989, Paul (fictional name), a citizen of Egypt, was operating a New York
restaurant when he met Deirdre (fictional name). The latter was an Irish
national on a two-day U.S. visitor's visa. After living together for some
months, the couple went through an Islamic marriage in March 1991. [Neither New
York nor federal law recognizes such marriages].
Four
months later, Deirdre gave birth to Hiram (fictional name). Both Paul and
Deirdre acknowledge that they were the biological parents of Hiram, who
apparently suffered from a form of epilepsy. After living as a family for 5-1/2
years, Deirdre and Hiram moved to another residence in New York state.
In
December 1996, a New York family court made an ex parte order giving Deirdre
the temporary custody of Hiram. Paul also filed in that court for visitation
rights, declaring himself to be Hiram's biological father.
Two
months later, Deirdre, an illegal alien, took Hiram and moved back to Ireland
to obtain the support of her family in raising Hiram. The New York Family Court
then ordered Deirdre to produce Hiram before the court.
In
March 1997, Paul went to Ireland and applied to the Central Authority under the
Hague Abduction Convention for aid in obtaining Hiram's return. He then
petitioned an Irish court for a return order, citing Article 12 of the
Convention. [Ireland has implemented the Convention by the Child Abduction and
Enforcement of Custody Orders Act of 1991.]
Paul argued that Deirdre's removal of Hiram had flouted the authority of
the New York Family Court and contended that, as father of an illegitimate
child, he had custody rights as to Hiram at the time of his abduction to
Ireland.
In
response, Deirdre maintained that no New York court had adjudicated Paul's
paternity and that, under New York law, this was a required preliminary to the
filing of custody or visitation proceedings by an unmarried father. Deirdre
also denied that Paul had a right of action under the Hague Convention since
Paul had no custody rights to be breached by Hiram's removal. Finally, her
lack of a right to stay in the U.S. meant that she had to find a permanent
lawful residence so as to secure proper treatment for Hiram.
The
Irish court of first instance ruled that the abduction amounted to a breach of
Paul's "inchoate right" to Hiram's custody. Deirdre appealed. In a 4
to 1 vote, the Supreme Court of Ireland allows her appeal.
The
Court first explains that Convention Article 3 itemizes three legal sources for
the right of custody: (1) by operation of the law of the state of habitual
residence; (2) by a judicial or administrative decision; or (3) by an agreement
having legal effect under the law of the state of habitual residence.
The
language of Article 3 seems to suggest that the three examples given are not
exhaustive. For example, the removal of a child in breach of an interim court order or while a
custody proceeding was pending, would violate the court of the requesting
state's right to have the child's residence remain in its jurisdiction until
the court decides otherwise. Nevertheless, it is going too far, in the Court's
view, to build up a "hinterland of inchoate rights" as the lower
court did.
"In
the present case, it is clear that the plaintiff had no right of custody under
the law of New York by operation of law, since he was not entitled to custody
unless and until a declaration of paternity was made in respect of him by the
New York court. Nor was there any agreement having legal effect under the law
of New York between the plaintiff and the defendant giving him such a
right."
"Nor
did the order of the New York court do any more than give the defendant interim
custody. There was no order at any time requiring the defendant to obtain the
consent of the plaintiff or a further order of the court before removing H from
the State of New York." Therefore,
Deirdre's removal of Hiram to Ireland did not violate Paul's custody rights
under the Convention.
The
Court is sympathetic to the difficulties created under the Convention by its failure
to grapple with the rights of unmarried fathers. In many jurisdictions,
including Ireland, such fathers have no automatic rights to custody. Rather
than relying on "innovative judicial responses" to obviate seemingly
harsh results, it is up to the Hague special commissions that monitor
Convention cases to address these problems.
Citation:
In Matter of Child Abduction and Enforcement of Custody Orders Act 1991 and
in Matter of HI (a minor), [1999] 2 I.L.R.M. 1, at 22 (Sup. Ct. Ire.).
CRIMINAL
LAW
German
Federal Supreme Court reverses criminal conviction where lower court failed to
obtain possibly exculpatory testimony by video conference of U.S. witness
unwilling to testify in Germany
The
1998 Witness Protection Act (Zeugenschutzgesetz) amended Section 247a of the
German Criminal Procedure Rules (Strafprozessordnung) to permit the
audio-visual interrogation of witnesses who are testifying outside the
courtroom. [The core rationale was to protect child complainants in abuse cases
from psychologically stressful questioning]. The amendment also applies to
witnesses abroad and to other witnesses who for some reason cannot testify in
person.
Here,
the Mannheim district court convicted defendant of cocaine-related offenses and
sentenced him to seven years and nine months in jail. The defendant had
allegedly received two of his cocaine shipments from a dealer in the United
States. Denying any involvement with the American drug dealer, the defendant
asked the German tribunal to question him in open court. The dealer answered
questions in New York but refused to appear in the German court.
The
Mannheim court deemed the transcript of the drug dealer's statements
incompetent evidence because the court could not obtain a "personal
impression" of the witness. In its ruling of September 15, 1999, the
Criminal Division of the Bundesgerichtshof (BGH) reverses the conviction on the
counts involving the cocaine shipments from the U.S. and remands for a new
trial on those counts only.
Both
German and U.S. law allow for the taking of testimony by video conferencing
even in the absence of a mutual legal assistance treaty (MLAT).
In
the BGH's view, the lower court had erred in finding the American witness
"unavailable" without first looking into the feasibility of
questioning the witness in this manner.
German
trial courts, however, may question a witness under such circumstances only if
it is "necessary to investigate the truth." The district court has to
determine whether that is the case here.
Citation:
[German] Bundesgerichtshof, 1. Strafsenat, Urteil vom 15. September 1999 - 1
StR 286/99; Press release of the Court Number 74/1999.
FEDERAL
TRADE COMMISSION
Eleventh
Circuit holds that Federal Trade Commission's Franchise Rule does not apply to
agreement between U.S. company and Argentine citizen dealing with potential
franchises in Argentina
Mario
Nieman, an Argentine citizen, and Dryclean U.S.A. Franchise Company, Inc.,
(DUSA) began negotiations over possible drycleaning franchises in Argentina. In
February 1994, the parties signed a letter agreement. Nieman signed it in
Argentina and mailed it to DUSA in Florida for signature.
The
agreement gave Nieman a sixty-day option to buy the master franchise agreement
in return for a $50,000 non-refundable deposit. Unfortunately for Nieman, he
could not arrange the needed financing within the sixty-day period and DUSA
kept the deposit.
Nieman
then sued DUSA for its return, citing Florida's Deceptive and Unfair Trade
Practices Act (DUTPA) that incorporates by reference the Federal Trade
Commission Franchise Rule, 16 C.F.R. Section 436.1 (1998). He claimed that DUSA
had failed to make the disclosures demanded by these provisions. DUSA, however,
defended on the grounds that neither Florida law nor the FTC Rule applied to
transactions in Argentina.
In
March 1997, the district court gave summary judgment to Nieman and ordered the
deposit refunded. The U. S. Court of Appeals for the Eleventh Circuit reverses,
however, holding against extraterritorial application of the FTC Franchise
Rule. Since the FTC Rule has the force of law only if pursuant to the FTC Act,
the next question is whether Congress intended the Act to apply to activities
taking place abroad.
Since
the Constitution grants powers to Congress mainly to deal with domestic
conditions, the courts presume that they must construe even broad statutory
language as intended to cover only events within U.S. territorial jurisdiction.
This presumption also tends to prevent unintentional collisions between U.S.
and foreign law that could lead to international discord. Only an expression of
clear congressional intent to reach foreign transactions can overcome the
presumption.
Nieman
relied upon the Act's definition of "commerce" as including
"commerce...with foreign nations."
The Court then discusses several Title VII and similar cases where the
Supreme Court and lower courts read similar definitions of commerce as not
extending statutory rights to foreign events or activities. Moreover, there is
no showing here that DUSA's failure to disclose facts had a substantial effect
on U.S. competition.
Even
assuming arguendo that Congress did intend to allow the FTC to apply its
regulations extraterritorially, the Circuit Court can find no indications that
the FTC actually exercised this type of authority.
"First,
the Franchise Rule was not intended to protect franchisees in foreign countries.
When it was promulgated, the Rule was accompanied by a Statement of Basis and
Purpose that reviewed the history of franchising in the United States and
discussed measures that had been taken by various U.S. federal agencies and
state governments to address unfair franchising practices."
"Second,
the provisions of the Rule itself reveal a purely domestic focus. For example,
the rule addresses potential conflicts with state law but does not mention
foreign law. (Cit.) Also, the Rule mandates a cover sheet that directs
prospective franchisees to consult appropriate state agencies but does not
mention foreign governmental agencies."
"Third,
the FTC has never indicated that the Franchise Rule was intended to apply to
foreign franchisees. For example, the Final Interpretive Guides devote a
section to potential conflicts between the Franchise Rule and state and local
laws, but are silent with regard to foreign laws."
"Finally,
the FTC recently issued an Advance Notice of Proposed Rulemaking, proposing to
modify the Rule to 'clarify' that it does not apply to the sale of franchises
to be located outside the United States. (Cit.) Although the FTC has not issued
a formal modification of the Franchise Rule, the Federal Register notices are
evidence that extraterritorial application of the Rule was not contemplated at
the time it was promulgated." [1131]
Citation:
Nieman v. Dryclean U.S.A. Franchise Co., Inc., 178 F.3d 1126 (11th Cir. 1999).
LABOR
LAW
Citing
Canadian Charter of Rights and Freedoms, Supreme Court of Canada strikes down
statutory definition of "picketing" as authorizing ban on Union's
non-coercive leafleting at K-Mart stores not actually involved in labor dispute
In
December 1992, United Food and Commercial Workers, Local 1518 (the Union) was
engaged in a labor dispute with two stores of K-Mart Canada Ltd.(KMC) in
British Columbia. One of the Union's tactics was to pass out leaflets at
several other KMC stores or "secondary sites" where the Union was not
certified. The leaflets set forth the Union's views as to KMC's alleged unfair
labor practices and tried to persuade customers to avoid spending their
"Christmas dollars" in K-Mart stores.
This
activity did not get in the way of KMC employees and did not disrupt the
shipment of supplies. There was no violence or intimidation and no blocking of
public access to the stores. Some members of the public showed bewilderment,
however, and a few apparently went elsewhere.
KMC
went to the Labor Relations Board (LRB) and persuaded it to order the union to
stop "picketing" at the secondary locations. The LRB declined the
Union's invitation to narrowly construe the statutory term
"picketing" so as not to apply to leafleting pursuant to Section 2(b)
of the Canadian Charter of Rights and Freedoms.
The
British Columbia Supreme Court and Court of Appeal dismissed the Union's
petition for judicial review. The Supreme Court of Canada, however, took the
case to determine whether the Labor Relations Code's definition of picketing
contravenes Section 2(b) on freedom of speech and, if so, whether Section 1
excuses the infringement. The Court allows the appeal.
Reviewing
the leading Canadian and American cases, the Court concludes that the
importance of a job to each person creates the need for workers to speak openly
on matters that pertain to working conditions. Leafleting is a centuries-old
and cost-effective way to furnish information in aid of reasonable persuasion.
Section 64 of the Labor Relations Code states that a trade union and its
members are free to communicate with the public about a labor controversy
unless it involves picketing.
On
the other hand, Section 1(1) of the Code defines picketing in such spacious terms
as to include leafleting. Other Code articles define what is proper and
improper picketing, and in this way the Code unduly restricts the Union's
freedom to pass out leaflets to explain its viewpoint to consumers.
Unlike
consumer leafleting, a picket line bars or hinders the public's access to goods
and services, the workers' ability to get to their work place and shippers'
ability to deliver goods. Leafleting, in short, lacks the coercive aspects of a
picket line though it may, like a lawful consumer boycott, cause the target
business to lose money.
What
is important is that a Union's activity must not take away the consumer's
freedom to accept or reject the literature as well as to enter or depart from
the neutral site. Here, the leaflets contained accurate, non-defamatory
messages and clearly spelled out that the Union's dispute was with the primary
employers only. Moreover, the number of leafleters was small and did not
interfere with the regular business routines at the secondary sites.
While
the LRB did purport to take the Charter into account, this Court has to decide
whether its interpretation was right. Sections 1, 65 and 67 of the Code totally
bars any persuasive activity by striking or locked-out employees at neutral
sites. The goal is to minimize the impact of labor unrest on persons and
companies not directly involved in it.
On
the present issue, however, the legislature failed to narrow its ban on
coercive picketing so as to protect the Union's right under the Charter to hand
out leaflets. The Court, therefore, strikes down the definition of
"picketing" in Section 1(1) of the Code but suspends its declaration
of invalidity for six months.
Citation:
United Food and Commercial Workers v. K-Mart Canada Ltd., File No.: 26209 (Sup. Ct. of Can., Sept. 9,
1999).
TAXATION
Where
U.S. company tries to reduce its tax liability through transactions with
American Depository Receipts (ADRs) of foreign corporation, U.S. Tax Court, as
matter of first impression, disallows foreign tax credit for purchase and
immediate resale of ADRs for lack of "economic substance"
The
following decision is part of a protracted proceeding in the U.S. Tax Court.
Here, the Court decides that Compaq Computer Corporation's purchase and resale
of American Depository Receipts (ADRs) lacked economic substance and that the
company was liable for an accuracy-related penalty. As a matter of first
impression, the Court applies the "economic substance doctrine" to a
foreign tax credit issue.
Compaq
Computer Corporation not only makes personal computers but also invests in the
stock of other computer companies. In 1992, Compaq sold its stock in Conner
Peripherals, Inc., recognizing a long-term capital gain of $231,682,881. Compaq
then turned to an investment firm, Twenty-First Securities Corporation, to help
save taxes through an arbitrage transaction involving ADRs.
[As
the Court explained in its decision, "[a]n ADR is a trading unit issued by
a trust, which represents ownership of stock in a foreign corporation that is
deposited with the trust. ADRs are the customary form of trading foreign stocks
on U.S. stock exchanges, including the New York Stock Exchange (NYSE). The ADR
transaction involves the purchase of ADRs 'cum dividend', followed by the
immediate resale of the same ADRs 'ex dividend'. 'Cum dividend' refers to a
purchase or sale of a share of stock or an ADR share with the purchase entitled
to a declared dividend (settlement taking place on or before the record date of
the dividend). 'Ex dividend' refers to the purchase or sale of stock or an ADR
share without the entitlement to a declared dividend (settlement taking place
after the record date)." (Slip op. 5)].
Through
a broker, Bear Stearns & Co., Inc., Compaq bought and quickly resold shares
of Royal Dutch Petroleum Company over a five-day period, totaling $887,577,129.
As of the dividend record date, Compaq was holding 10 million Royal Dutch ADRs
and received a dividend of $22,545,800 of which the Dutch Government withheld
$3,381,870 as tax withholding for dividends to U.S. residents under the
U.S.-Netherlands Tax Treaty ("Convention With Respect to Taxes on Income
and Certain Other Taxes," April 29, 1948, Article VII, para. 1, 62 Stat.
1757, 1761). On its 1992 tax return, Compaq claimed a short-term capital loss
on the purchase and resale of Royal Dutch ADRs in the amount of $20,652,816.
Compaq also reported the dividend income and claimed a foreign tax credit of
$3,381,870.
The
U.S. Tax Court finds that Compaq had consciously devised this transaction to
reduce federal income taxes. Compaq had no business purpose for trading Royal
Dutch shares apart from obtaining tax benefits in the form of a foreign tax
credit and offsetting the previously recognized capital gain.
"The
cash-flow deficit arising from the transaction, prior to the use of the foreign
tax credit, was predetermined by the careful and tightly controlled
arrangements made between the petitioner [Compaq] and Twenty-First. The
scenario was to 'capture' a foreign tax credit by timed acquisition and sale of
ADRs over a 5-day period in which petitioner bought ADRs cum dividend ... and
resold them ex dividend ... Petitioner was acquiring a foreign tax credit, not
substantive ownership of Royal Dutch ADRs." [Slip Op. 20-21].
In
Frank Lyon Co. v. United States, 435 U.S. 561, 583-584 (1978), the U.S. Supreme
Court stated that, for tax purposes, the courts should respect "a genuine
multiple-party transaction with economic substance compelled or encouraged by
business or regulatory realities, imbued with tax-independent considerations,
and not shaped solely by tax-avoidance features."
The
applicability of the "economic substance doctrine" to disregard a
foreign tax credit is an issue of first impression. The Tax Court applies it
here and finds the accuracy-related penalty appropriate.
The
individuals involved in the transaction "were sophisticated professionals
with investment experience and should have been alerted to the questionable
economic nature of the ADR transaction. They, however, failed to take even the
most rudimentary steps to investigate the bona fide aspects of the ADR
transaction. ... [P]etitioner did not investigate the details of the
transaction, the entity it was investing in, the parties it was doing business
with, or the cash-flow implications of the transaction." [Slip Op. 28].
Citation:
Compaq Computer Corp. v. Commissioner of Internal Revenue, No. 24238-96
(U.S. Tax Court Sept. 21, 1999).
TRADEMARK
European
Court of Justice interprets First Trade Mark Directive of 1989 as precluding
consensual exhaustion of Community trade mark rights unless owner has consented
to marketing of each specific batch of trademarked goods within EC or EEA
Sebago
Inc., a U.S. corporation, owned two Benelux trademarks on shoes in the name
"Docksides" and three trademarks in the name "Sebago." Ancienne Maison Dubois et Fils S.A.
("Maison Dubois") was the sole authorized Benelux distributor of
shoes bearing Sebago's trademarks.
GB‑Unic,
S.A. procured 2,561 pairs of shoes from a Belgian company specializing in
parallel imports. Sebago had consented to their manufacture in El Salvador.
Relying on the principle of "international exhaustion," GB‑Unic
claimed that Sebago, by not barring its Salvadoran licensee from shipping the
shoes overseas to the European Community, had impliedly agreed to the Community
marketing of that batch of shoes.
Sebago,
however, disputed the existence of such a license. Conceding that the shoes
were genuine, it argued that it had not approved the sale of this batch in the
Community (or in the EEA countries of Norway, Iceland and Liechtenstein). Thus,
GB‑Unic had no right to sell them there.
Sebago
and Maison Dubois then sued in the Belgian courts claiming that GB‑Unic had
infringed Sebago's trademark rights. Plaintiffs relied on Article 13A(8) of the
Uniform Benelux Law on Trade Marks, as amended by the Benelux Protocol of
December 2, 1992. This provision is similar in terms to Article 7(1) of the
First Trade Mark Directive (Directive 89/104).
Under
Directive Article 7(1), a trademark owner has no right to ban its use on goods
that a third party had put on the Community or EEA market under that trademark,
by or with the owner's consent. The Belgian court suspended its proceedings and
referred several questions of EC law to the European Court of Justice (ECJ) for
a preliminary ruling under Article 234 [ex Article 177].
The
first question asked whether Article 7(1) meant that a proprietor could object
to the use of its trademark on genuine goods imported from outside the
Community (or the EEA) without its consent. On the consent issue, the Belgian
court asked whether there was Article 7(1) consent where the trademark owner
had allowed marketing in the EEA of goods similar or the same as those as to
which exhaustion is asserted. Plaintiffs contended that, for exhaustion of
rights to occur, the owner has to consent to the Community marketing of each
individual item or batch of items.
On
the first question, the Fifth Chamber of the ECJ reaffirms its ruling on
Community exhaustion in the Silhouette International case [see 1998 Int'l
Law trademark rights only by a marketing
of the products in the EC or the EEA. Moreover, the Member States could not
provide in their internal law a differing principle of exhaustion with respect
to products marketed in non-member countries.
As
to consent, the ECJ holds that the goals of Article 7(1) were (1) to allow the
"further commercialization" of individual product items bearing a
trademark where the owner had previously consented to the EC/EEA marketing of
those items and (2) to preclude the owner from objecting to this later
marketing.
In
the ECJ's view, exhaustion by prior consent must apply to each individual item
or batch of items. Article 7 would lose most of its protective thrust if it
were enough that the trademark owner had merely approved the prior marketing of
other similar or identical goods.
Citation:
Sebago Inc. v. GB‑Unic S.A. Case C‑173/98, [1999] 2 CMLR 1317 (Eur. Ct.
Just. (5th Chamber).
WORLD
TRADE ORGANIZATION
In
proceeding brought by EC, WTO Panel holds that U.S. system of "Foreign
Sales Corporations" (FSCs) that grants tax benefits to U.S. companies is
incompatible with GATT trading rules
A
Dispute Settlement Panel of the World Trade Organization (WTO) has ruled
against the U.S. in the dispute with the European Communities (EC) over
American "Foreign Sales Corporations" (FSCs). The Panel report was
circulated on October 8, 1999.
The
EC had brought the complaint before the WTO on November 18, 1997, alleging that
American FSC rules that grant U.S. income tax exemptions for a portion of the
foreign-source income are incompatible with U.S. obligations under the WTO
Subsidies and Agriculture agreements.
An
FSC is essentially a tax construct under Sections 921-927 of the Internal
Revenue Code that reduces U.S. income taxation. Under Section 921 of the
Internal Revenue Code, "[e]xempt foreign trade income of a FSC shall be
treated as foreign source income which is not effectively connected with the
conduct of a trade or business within the United States."
The
EU claims that U.S. companies receive 64% corporate income tax relief on
profits made through offshore subsidiaries and pay no taxes at all when they
expatriate the profits.
The
U.S. introduced FSC rules in the early 1980s after the GATT Council found the
prior provisions, the "Domestic International Sales Corporation"
(DISC) rules, to be improper export subsidies. The FSC rules exempt a
corporation from U.S. income tax if it has a foreign presence, if it meets
certain management and economic process requirements as to the foreign sales,
and if it has a minimum level of costs caused by the foreign sales activities.
The
WTO Panel essentially agrees with the EC that the FSC tax exemptions are an
improper export subsidy under Article 3.1(a) of the WTO Agreement on Subsidies
and Countervailing Measures (SCM) and the Agreement on Agriculture.
In
particular, the Panel holds that:
(a)
The U.S. has acted inconsistently with Article 3.1(a) of the SCM Agreement by
granting or maintaining improper export subsidies.
(b)
The U.S. has acted inconsistently with its obligations under Article 3.3 of the
Agreement on Agriculture by providing improper export subsidies as listed in
Article 9.1(d) of the Agreement.
The
Panel recommends that the U.S. effectively withdraw its FSC subsidies by
October 1, 2000.
Citation:
United States - Tax Treatment for "Foreign Sales Corporations"
(WT/DS108/1) (8 October 1999); U.S. Trade Representative press release 99-64
(July 26, 1999); The Wall Street Journal, September 21, 1999, page A6. [The
Panel Report is available on the WTO website www.wto.org.]
London
court finds General Pinochet extraditable to Spain. On October 8, 1999, the
Bow Street Magistrates Court ruled that the British government may extradite
General Augusto Pinochet to Madrid for trial on one charge of conspiracy to
torture and thirty-four charges of torturing individual citizens of Chile.
Under British procedure, the eighty-three-year-old General has fifteen days
within which to file an appeal. This might eventually bring the case back to
the House of Lords which has already issued two lengthy opinions that focused
mainly on the legality of his arrest. The completion of the available appeals
would send the matter back to Mr. Jack Straw, the Home Secretary, who has
judicially reviewable discretion as to whether physically to deliver Pinochet
to Spanish authorities. It is possible that Mr. Straw would set the General
free on compassionate grounds based on his age and poor health. Citation:
The text of the ruling is available on the internet at
www.open.gov.uk/lcd/magist/pinochet.html; New York Times, Oct. 9, 1999, Section
A, page 4 (byline by Warren Hoge). [There are several internet websites with
information on the Pinochet case, for example, www.publica.com/pinochet.html.]
U.S.
continues sanctions against UNITA. On September 26, 1993, by Executive
Order 12865, President Clinton banned the supply of arms, petroleum, vessels,
aircraft and related materials to the National Union for the Total Independence
of Angola (UNITA). Subsequent Executive Orders closed all UNITA offices in the
U.S., and blocked aircraft-related services that benefitted UNITA as well as
UNITA assets. On September 21, 1999, the President issued a notice that the
sanctions will continue in accordance with Section 202(d) of the National
Emergencies Act [50 U.S.C. Section 1622(d)]. Citation: 64 Federal
Register 51419 (September 23, 1999).
U.S.
Department of Commerce issues rule regarding Chemical Weapons Convention.
In May, 1999, the U.S. Department of Commerce, Bureau of Export Administration,
issued an interim rule implementing the export control and reporting
requirements of the Chemical Weapons Convention (64 Federal Register 27138).
The Bureau has now issued another interim rule to revise the Export
Administration Regulations to add Estonia, the Holy See, Micronesia, Nigeria
and Sudan as parties to the Convention. Hong Kong is treated like the People's
Republic of China. The rule also clarifies the licensing policy for exports and
re-exports of Schedule 2 and Schedule 3 chemicals by removing the presumption
of approval. This does not, however, change current licensing policy. The rule
also adds the Taiwan contacts for issuing End-Use Certificates. Citation:
64 Federal Register 49380 (September 13, 1999).
Supreme
Court of India requires fair compensation for prisoner labor. Article 23 of
the Indian constitution bans "forced labor." The Indian Supreme Court rules that this does
not bar involuntary hard labor by convicted prisoners serving
"rigorous" sentences. On the other hand, the Court holds that
provincial governments must pay equitable wages to prisoners for work done.
Moreover, each province must set up a wage fixation body to recommend what
would constitute a just wage rate. The Court also requires provincial
governments to enact laws that would set aside a portion of prisoner wages to
be used in some form to compensate deserving victims of the prisoner's crime.
Prison officials may allow prisoners awaiting trial or serving simple
imprisonment the freedom to choose whether or not to undertake work of their
choice. Citation: State of Gujarat v. High Court of Gujarat, 7 S.C.C.
392 (Sup. Ct. India, 1998) as reported in Bulletin of Legal Developments, Issue
No. 13, July 12, 1999.
U.N.
human rights body rules against Japan in "sex slave" inquiry. On
August 26, 1999, the United Nations Subcommission on Human Rights ruled that
Japan owes compensation to those women it used as "sex slaves" for
the Japanese military during the period of World War II. In a 15 to 2 vote, the
Subcommission rejected Japan's arguments that post-war treaties had settled
all claims against it arising out of the conflict. The U.N. body stressed that
international law makes governments accountable for war crimes and other
violations of human rights committed by its military personnel. It also
stressed the importance of compliance with its rulings on human rights matters.
Citation: 15 International Enforcement Law Reporter, No. 10 (Oct. 1999).
EU
lifts its Libya sanctions except for arms embargo. On April 16, 1999, the European Council
suspended the restrictive measures the EU had imposed on Libya pursuant to
United Nations Security Council Resolutions (UNSCR) 748 (1992) and 883 (1993),
and confirmed the EU measures originally imposed in 1986 for Libya's support of
terrorism. Based on a report dated June 30, 1999, by the UN Secretary-General
declaring that Libya had renounced international terrorism, the EU has lifted
its remaining restrictive measures except for the arms embargo. Citation:
1999 O.J. of the European Communities (L 242) 31, 14 September 1999.
U.S.
expands air traffic with Cuba. At present, the U.S. has authorized flights
between Cuba and the U.S. only through the Miami International Airport. The
U.S. Customs Services has just issued a final rule to permit flights also
between Cuba and the U.S. through John F. Kennedy International Airport, New
York, and Los Angeles International Airport, Los Angeles. The effective date
was October 4, 1999. Citation: 64 Federal Register 53627 (October 4,
1999).
EU
imposes sanctions on Indonesia because of East Timor situation. Because of
the alleged violations of human rights in East Timor, the European Union (EU)
has imposed restrictive measures on the Republic of Indonesia. The measures
include an arms embargo and bans on the sales of military spare parts and
technology. The restrictions also include equipment that Indonesia might use
for internal repression or terrorism. The EU also suspends bilateral military
cooperation between Indonesia and EU Member States. Citation: 1999 O.J.
of the European Communities (L 245) 53, September 17, 1999.
U.S.
Securities and Exchange Commission issues international disclosure standards.
The SEC is adopting new disclosure requirements for foreign private issuers of
securities to adapt to the international disclosure standards endorsed by the
International Organization of Securities Commissions in September 1998. The new
requirements will replace most of the non-financial disclosures of Form 20-F,
the basic disclosure document for foreign private issuers. The rule also
clarifies how "foreign private issuers" must determine whether their
shareholders are U.S. residents. The effective date of the rule will be
September 30, 2000. Citation: 64 Federal Register 53900 (October 5,
1999).
U.S.
and South Africa sign treaties on extradition and mutual legal assistance.
On September 16, 1999, U.S. Attorney General, Janet Reno, and South African
Minister of Justice, Penuell Maduna, signed a new extradition treaty and a
mutual legal assistance pact. The new Extradition Treaty will replace the
current one that dates from 1947 and will improve the ability of both countries
to arrest and return criminal fugitives for all crimes that are punishable in
both countries. The new Mutual Legal Assistance Treaty (MLAT) is the first one
the U.S. has concluded with a country in the South African region and will
facilitate the exchange of evidence and other cooperation between the law
enforcement agencies of each country. Citation: U.S. Department of
Justice press releases of September 15 and September 16, 1999.
EU
expands its sanctions on Yugoslavia. The European Union (EU) has amended
and expanded its sanctions imposed on Yugoslavia. It has amended (1) the list
of Yugoslav and Serbian individuals who will not be admitted into the EU,
including President Milosevic and his family, (2) the list of competent EU
authorities in charge of the freeze of Yugoslav funds and the ban on
investments, as well as the competent authorities in charge of the prohibition
on petroleum supply to Yugoslavia, and (3) has issued a new regulation
restricting the supply of petroleum and related products (such as lubricants). Citation:
1999 O.J. of the European Communities (L 242) 32 (non-admissible persons), (L
244) 39 (freeze of funds and ban on investments), (L 244) 40 (competent
authorities for petroleum), and (L 258) 12 (petroleum).
U.S.
and Turkey sign framework agreement on trade and investment. On September
29, 1999, U.S. Trade Representative, Charlene Barshefsky, and Turkish Minister
of Industry and Trade, Ahmet Kenan Tanrikulu, signed a Trade and Investment
Framework Agreement (TIFA). The purpose of the Agreement is to expand trade and
investment opportunities between the two countries. It establishes a joint
Council on Trade and Investment made up of representatives of both governments,
and chaired by the U.S. Trade Representative and the Turkish Undersecretariat
for Foreign Trade. This Council provides a communication channel to discuss
trade and investment issues on an ongoing basis. Citation: U.S. Trade
Representative press release 99-79 (September 29, 1999).
Macedonia
and Romania sign textile trade agreement with U.S. The U.S. Trade
Representative has signed textile agreements with Macedonia (on September 17)
and Romania (on September 10). The Kosovo conflict has adversely affected both
countries. The parties concluded the Agreements under the Outward Processing
Program for Textiles and Apparel which the U.S. had not previously applied
outside the Western Hemisphere. The Agreements exempt certain wool apparel from
U.S. import quotas as long as the two Balkan nations manufacture the garments
from wool produced in the U.S. The agreements will take effect on January 1,
2000. Citation: U.S. Trade Representative press release 99-75 (September
17, 1999).
U.S.
and Bahrain sign bilateral investment treaty. On September 29, 1999, U.S.
Trade Representative, Charlene Barshefsky, and Bahraini Minister of Finance and
National Economy, H.E. Abdullah Hassan Saif, signed a Bilateral Investment
Treaty (BIT) in Washington, D.C. For most economic sectors, the Treaty
guarantees each party the right to invest on terms no less favorable than those
accorded to domestic or third-country investors. It also guarantees the free
transfer of capital, profits and royalties, freedom from performance
requirements that distort trade and investment flows, access to international
arbitration, and application of internationally accepted standards for expropriation
and compensation. This BIT is the first investment treaty that the U.S. has
signed with a Persian Gulf nation, and is the 45th since the BIT program began
in 1982. Citation: U.S. Trade Representative press release 99-80
(September 29, 1999).
