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

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

2002 International Law Update, Volume 8, Number 11 (November)

AVIATION

In proceeding by EC Commission against United Kingdom, European Court of Justice rules that U.K.’s “open skies” agreement with United States unlawfully discriminates against Member State air carriers established in U.K. but not owned or controlled by U.K. nationals, thus failing to comply with “national treatment” demanded by EC Treaty with respect to airlines of other Member States

The United Kingdom entered into bilateral agreements on air transport (“open skies” agreements) with the United States beginning in the mid 1940s. The U.K. and the U.S. concluded the first Bermuda agreement (Bermuda I) in 1946. Article 6 of this Agreement provided that: “ [e]ach Contracting Party reserves the right to withhold or revoke the exercise of the rights specified in the Annex to this Agreement by a carrier designated by the other Contracting Party in the event that it is not satisfied that substantial ownership and effective control of such carrier are vested in nationals of either Contracting Party ...”

In July 1977, over four years after the U.K. had entered the EC, the same parties updated the Bermuda I Agreement. Article 5 of Bermuda II declares in pertinent part: “(1) Each Contracting Party shall have the right to revoke, suspend, limit or impose conditions on the operating authorisations or technical permissions of an airline designated by the other Contracting Party where: (a) substantial ownership and effective control of that airline are not vested in the Contracting Party designating the airline or in nationals of such Contracting Party; .. (2) ... such rights shall be exercised only after consultation with the other Contracting Party.”

Moreover, Article 3(6) of Bermuda II provided that a condition of a Contracting Party’s duty to authorize the operations of an airline is that the designating Party or its nationals have substantial ownership and effective control of the requesting airline. Between 1992 and 1994, the U.S. intensified its efforts to enter into similar bilateral “open skies” agreements with the largest possible number of European States.

In a November 1994 letter to all EC Member States, the EC Commission declared, inter alia, that only the Community could lawfully and effectively negotiate air transport agreements with third nations such as the U.S. The following July, the Commission formally notified the U.K. that, by its Agreement with the U.S., it had failed to fulfill its duties under [old] Article 52 of the EC Treaty.

It noted that, under Bermuda II, among the air carriers which had gotten licenses from the U.K. pursuant to Council Regulation (EEC) No. 2407/92 and had exercised their rights of establishment in the U.K., only those owned and controlled by U.K. nationals could acquire traffic rights in the U.S. -- thus barring those licensed and established carriers that nationals of other Member States owned and controlled. Undeterred, the U.K. went ahead and finalized Bermuda II on June 5, 1995.

Unsatisfied by the U.K.’s response to its later Reasoned Opinion, the EC Commission, on December 1998, filed a proceeding against the United Kingdom in the European Court of Justice under old Article 169 of the EC Treaty (now Article 226 EC). It asked for a declaration that the U.K. has failed to carry out its duties under Article 52 of the EC Treaty (now, after amendment, Article 43 EC). In an eleven-member panel, the European Court of Justice rules for the Commission.

The U.K. first contended that Bermuda II did not amend or substantially change the provisions of Bermuda I entered into prior to the U.K.’s accession to the EC, i.e., before January 1, 1973. Under old Article 234 (now Article 307), the Treaty is not to affect those rights and duties generated by pre-accession agreements entered into with third nations.

The Court, however, points out that the same Article also demands that Member States take all proper steps to get rid of any incompatibilities between their previous agreements and the Treaty. In the Court’s view, therefore, Article 234 cannot rescue the U.K. What creates the difficulty here is Bermuda II, entered into four years after the U.K. joined the EC, not Bermuda I.

“As the final recital in its preamble states, the Bermuda II Agreement was concluded ‘for the purpose of replacing’ the Bermuda I Agreement, in particular in order to take into account the development of traffic rights between the Contracting Parties. It thus gave rise to new rights and obligations between those parties.”

“In those circumstances, it is not possible to attach to the Bermuda I Agreement the rights and obligations which, for the United Kingdom and the United States of America, have flowed from the clause in the Bermuda II Agreement concerning the ownership and control of air carriers since the entry into force of that latter agreement.” [Para. 29]

The central issue in this case centers on [old] Article 52 of the Treaty (now Article 43). Its second paragraph provides in relevant part that: “Freedom of establishment shall include the right ... to set up and manage undertakings, in particular, companies or firms within the meaning of the second paragraph of Article 48 under the conditions laid down for its own nationals by the law of the country where such establishment is effected...” [emphasis added].

As the Court points out, no provision of the Treaty bars old Article 52 from applying to air transport. Nor does it matter whether or not the Community has already legislated on air transport outside the Community.

“Articles 52 and 58 of the Treaty thus guarantee nationals of Member States of the Community who have exercised their freedom of establishment and companies or firms which are assimilated to them the same treatment in the host Member State as that accorded to nationals of that Member State [Cite] both as regards access to an occupational activity on first establishment and as regards the exercise of that activity by the person established in the host Member State.” [Para. 45]

The 1977 agreement, however, denies Member State airlines the “national treatment” guaranteed by the Treaty. “In this case, Article 5 of the Bermuda II Agreement permits the United States of America, inter alia, to revoke, suspend or limit the operating authorisations or technical permissions of an airline designated by the United Kingdom but of which a substantial part of the ownership and effective control is not vested in that Member State or its nationals.” [Para. 47]

“It follows that Community airlines may always be excluded from the benefit of the Bermuda II Agreement, while that benefit is assured to United Kingdom airlines. Consequently, Community airlines suffer discrimination which prevents them from benefiting from the treatment which the host Member State, namely the United Kingdom, accords to its own nationals.”

“Contrary to what the United Kingdom maintains, the direct source of that discrimination is not the possible conduct of the United States of America but Article 5 of the Bermuda II Agreement, which specifically acknowledges the right of the United States of America to act in that way. Consequently, by concluding and applying that agreement, the United Kingdom has failed to fulfil its obligations under [old] Article 52 of the Treaty.” [Paras. 50-52]

Finally, the U.K. falls back on Article 56 (1) (now Article 46). It provides in part that: “the provisions of this Chapter and measures taken in pursuance thereof shall not prejudice the applicability of provisions laid down by law, regulation or administrative action providing for special treatment for foreign nationals on ground of public policy, public security or public health ...”

The Court, however, is not persuaded that this provision applies here. “It should be recalled that, according to settled case‑law, recourse to justification on grounds of public policy under [old] Article 56 of the Treaty presupposes the need to maintain a discriminatory measure in order to deal with a genuine and sufficiently serious threat affecting one of the fundamental interests of society [Cites]. It follows that there must be a direct link between that threat, which must, moreover, be current, and the discriminatory measure adopted to deal with it [Cites].”

“In this case, Article 5 of the Bermuda II Agreement does not limit the power to refuse operating authorisations or the necessary technical permissions to an airline designated by the other party solely to circumstances where that airline represents a threat to the public policy of the party granting those authorisations and permissions.”

“There is no direct link between such [a] (purely hypothetical) threat to the public policy of the United Kingdom as might be represented by the designation of an airline by the United States of America and generalised discrimination against Community airlines. The justification put forward by the United Kingdom on the basis of Article 56 of the Treaty must therefore be rejected.” [Paras. 57-60]

The European Court of Justice rules similarly as to “open skies” agreements entered into with United States by seven other EU Member States. The other “open skies” rulings also handed down by the ECJ on November 5, 2002 consisted of: Commission v. Republic of Austria, EU: Case C-475/98; Celex No. 698J0475; Commission v. Kingdom of Belgium, EU: Case C‑471/98; Celex No. 698J0471. Commission v. Kingdom of Denmark, EU: Case C‑467/98; Celex No. 698J0467. Commission v. Republic of Finland, EU: Case C‑469/98; Celex No. 698J0469. Commission v. Federal Republic of Germany, EU: Case C‑476/98; Celex No. 698J0476. Commission v. Grand Duchy of Luxembourg, EU: Case C‑472/98; Celex No. 698J0472. Commission v. Kingdom of Sweden, EU: Case C‑468/98; Celex No. 698J0468.

In each case, the ECJ concludes that, in entering into an “open skies” agreement with the United States, the above Member States had failed to fulfil their Community obligations under the EC Treaty and secondary law. Specifically involved were Articles 5 (now Article 10 EC) and 52 (now, after amendment, Article 43 EC) of the Treaty.

The applicable secondary law in the majority of cases consisted of Council Regulation (EEC) No 2407/92 of 23 July 1992 on the licensing of air carriers (OJ 1992 L 240, p. 1), Council Regulation (EEC) No 2408/92 of 23 July 1992 on access for Community air carriers to intra‑Community air routes (OJ 1992 L 240, p. 8), Council Regulation (EEC) No 2409/92 of 23 July 1992 on fares and rates for air services (OJ 1992 L 240, p. 15), Council Regulation (EEC) No 2299/89 of 24 July 1989 on a code of conduct for computerized reservation systems (OJ 1989 L 220, p. 1), as amended by Council Regulation (EEC) No 3089/93 of 29 October 1993 (OJ 1993 L 278, p. 1), and Council Regulation (EEC) No 95/93 of 18 January 1993 on common rules for the allocation of slots at Community airports (OJ 1993 L 14, p. 1).

Differences in the various rulings typically arose out of differing wording in the prior or present agreements, some variations in EC law as of the dates on which each state became bound by it and in the defenses raised by each Member State. On certain common issues, the Court’s language is substantially identical with respect to each Member State.

Citation: EC Commission v. United Kingdom, EU Case C-466/98, Celex No. 698J0466, [2002] ECR 0 (November 5, 2002). For additional background on these rulings, see The Wall Street Journal, Global Report, November 6, 2002, page A3 (bylines of Scott Miller, Susan Carey and Neil King, Jr.); Financial Times, November 6, 2002, page 7 (byline of Daniel Dombey)].

BANKRUPTCY

In bankruptcy proceeding involving simultaneous proceedings in courts of Delaware and Belgium, Third Circuit remands to determine dictates of international comity and choice of law and suggests that Belgian and Delaware courts communicate among themselves as to how best to resolve transnational complexities

Lernout & Hauspie Speech Products, N.V. (L&H) is a company established in Belgium that does business in the U.S. It specializes in speech recognition technology and related products. Stonington is an ERISA fiduciary that manages investment capital of various pension funds and financial institutions. In 1995, it bought Dictaphone Corporation (DC) and made it into a respected medical transcription service.

In mid-2000, L&H merged with DC in exchange for L&H stock. On November 27, 2000, Stonington sued L&H in Delaware state court, alleging that the L&H stock was worthless and that L&H had procured the purchase by fraud. On November 28, 2000, Stonington obtained a Belgian court order directing L&H to turn over its shares of DC to a court-appointed trustee. On November 29, 2000, L&H filed for Chapter 11 bankruptcy in Delaware federal court. One day later, it filed a second plenary insolvency proceeding in Belgium.

The main question in this proceeding is how to treat the DC Merger Claims. “Stonington asserted the right to pursue allowance and treatment of these claims in Belgium, where they would be treated as unsecured claims, on a parity with other unsecured creditors, and where they would not be subject to subordination, as would be called for under Section 510 of the U.S. Bankruptcy Code. It is clear that L&H desired that Section 510(b) be applied to Stonington’s claims, and [it] seems that the amount of Stonington’s claims – estimated to be $500 million – would, in combination with the other 510(b) claims, dwarf the unsecured claims if not subordinated.” [Slip Op. 5-6]

In May 2001, the U.S. Bankruptcy Court held that Stonington’s are pre-petition claims which are subject to the mandatory subordination of Section 510(b). The Belgian court, in the following month, rejected L&H’s reorganization plan that would have subordinated Stonington’s claims based on principles of Belgian bankruptcy law that require equal treatment of such claims. Because of this conflict between U.S. and Belgian bankruptcy laws, Stonington’s Belgian counsel suggested that L&H dismiss its Chapter 11 case because of the “impossible mission” of “combining the irreconcilable requirements of Belgian and U.S. law.”

The Delaware state court eventually granted L&H’s motion to determine the matters according to the U.S. Bankruptcy Court, and enjoined Stonington from pursuing the matter in Belgium. Stonington noted its appeal. The U.S. Court of Appeals for the Third Circuit reverses and remands.

As for the “Anti-Suit” Injunction, the Court cautions: “Based on a ‘serious concern for comity,’ we have adopted a restrictive approach to granting such relief. ... And, we have described international ‘comity’ as the ‘recognition which one nation extends within its own territory to the legislative, executive, or judicial acts of another ... [that] should be withheld only when its acceptance would be contrary or prejudicial to the interest of the nation called upon to give it effect.’ ...”

“The principles of comity are particularly appropriately applied in the bankruptcy context because of the challenges posed by transnational insolvencies and because Congress specifically listed ‘comity’ as an element to be considered in the context of such insolvencies, albeit in relation to ancillary proceedings.” [Slip op. 16] Here, however, the Third Circuit does not have enough information to determine whether this is one of those rare cases where it should enjoin a party from taking part in a foreign proceeding. It therefore remands this matter to the U.S. Bankruptcy Court to consider the issue.

The Circuit Court then turns to the choice-of-law issue, which requires more than just an analysis of contacts. “It requires, in addition, a qualitative assessment that can only occur if there is some understanding, and explication, of the way in which the allowance, or subordination, of the claims at issue would advance or detract from each nation’s policy regarding insolvency proceedings and distributions to creditors. For instance, the Bankruptcy Court should consider the strength of the United States’ interest in applying its bankruptcy laws and, specifically, its subordination rules in these circumstances.”

“The policies generally furthered by subordination may be less compelling here if Stonington was induced to enter a merger agreement, and become an equity holder, by fraud. The Bankruptcy Court should also consider the countervailing Belgian subordination rules and underlying policies, which are mentioned, but not developed, in the record. This discussion was not present in the Bankruptcy Court’s consideration here and should be undertaken when the Bankruptcy Court engages in a choice-of-law determination.” [Slip op. 30-31]

In remanding the case to the Bankruptcy Court, the Court furnishes some guide lines.. “We strongly recommend, in a situation such as this, that an actual dialogue occur or be attempted between the courts of the different jurisdictions in an effort to reach agreement as to how to proceed or, at the very least, an understanding as to the policy considerations underpinning salient aspects of the foreign laws. Maxwell Communication Corp. v. Societe General (In re Maxwell Communication Corp.), 93 F.3rd 1036 (2d Cir. 1996) [see 1996 Int’l Law Update 138] provides a good example. There, the Court of Appeals for the Second Circuit attributed the ‘high level of international cooperation and significant degree of harmonization of the laws of the two countries’ in large part to ‘the cooperation between the two courts overseeing the dual proceedings.’ [Cite]”

“While we do not know whether the cooperation there was initiated by the court or the parties, there is no reason that a court cannot do so, especially if the parties (whose incentives for doing so may not necessarily be as great) have not been able to make progress on their own. ... In Maxwell, the court suggested that ‘bankruptcy courts may best be able to effectuate the purposes of bankruptcy law by cooperating with foreign courts on a case-by-case basis.’ ...”

“Even if cooperation could not be achieved, it would be valuable to communicate regarding the policies animating a certain law so as to be better able to perform a choice-of-law analysis. While not required by our case precedent or any principle of law, we urge that, in a situation such as this, communication from one court to the other regarding cooperation or the drafting of a protocol could be advantageous to the orderly administration of justice.” [Slip op. 35-37]

Citation: Stonington Partners, Inc. v. Lernout & Hauspie Speech Products N.V., 310 F.3d 118 (3rd Cir. 2002).

CORPORATIONS

In corporate fraud litigation, Newfoundland and Labrador Court of Appeal holds that applicable corporations statute does not allow award of general damages for fraud or for civil conspiracy but only such amounts that compensate plaintiff for actual financial losses such as for costs of related Oklahoma litigation

The government of Newfoundland Province (Government) issued an five-year exploration permit (Permit) to Canadian Roxana Resources Limited (CRR), a British Columbia corporation. The Permit authorized CRR to explore for oil and gas in western Newfoundland.

Gary Jonson, a resident of Oklahoma, was the chief executive officer of CRR and was involved with another British Columbia corporation called Tucan Ventures Inc. (TVI). CRR and TVI agreed to incorporate a Newfoundland company to be called Sandhurst Roxana Exploration Limited (SREL) in which each company would own one half of the issued shares. In consideration of a promissory note, CRR would transfer the Permit to SREL.

The government required SREL to spend $80,000 per year or a total of $400,000 between 1993 and 1998 on exploration or to pay any shortfall to the Government. A small group of American investors became shareholders, in proportion to their investment, in plaintiff American Reserve Energy Corporation (AREC). Financed by AREC in the amount of $390,000, defendants gave back a promissory note (Note) issued by Sandhurst Petroleum Corporation (SPC), a subsidiary of TVI, that was due and payable in 1996. As an added inducement, TVI gave plaintiff an option to buy 25% of the shares in SREL, for a nominal price, the so-called “Stock Pledge Agreement” (SPA). All agreements provided that Oklahoma law would apply.

The parties soon fell out. CRR and TVI formed a Nova Scotia company, Sandhurst Roxana Agencies Limited (SRAL), in which each company owned 50% of the shares. SREL assigned the original and later permits to SRAL. When SREL defaulted on AREC’s note, plaintiff gave notice and announced it was exercising its stock option. In January 1997, it filed a law suit in the Oklahoma courts against CRR, TVI and SPC.

Two days prior to the hearing on plaintiff’s application for preservation orders in a Newfoundland court, SRAL further transferred some permits to a new provincial company, NewCo., and assigned the balance to a new Oklahoma company. (Without disclosure to plaintiff, the government had sanctioned each of these transfers.)

After a six-month trial on the merits, the Canadian court ruled that AREC had the right to foreclose on its security and that the corporate defendants and their principal were liable to pay $550,000 in general damages for acts of oppression and conspiracy.

Wesley V. McDorman (the principal) noted an appeal. The Newfoundland and Labrador Court of Appeal concludes that the evidence below was enough to support the findings of liability on defendants’ part and dismisses the appeal as to that issue. Finding that the damage award was erroneous, however, the Court allows that prong of the appeal.

The applicable Corporations Act [R.S.N.L. 1990, c. C-36] on civil remedies allows for actual damages but only to remedy the oppression carried out by a defendant. Neither this section nor any other statute allows the award of general damages in cases like this. The lower court set the plaintiff right by setting aside the fraudulent permit transfer, thus ensuring to him the value from the retransfer to the exploration company.

In like manner, the court properly limited plaintiff’s damages for civil conspiracy to the actual loss it had cost him. Plaintiff, for example, proved that he had lost $99,000 in having to pay the costs of the Oklahoma lawsuit. The appellate court then sets forth the appropriate disposition of the case.

“The respondent, having received the benefit of all of the non‑financial remedies which it sought in respect of both the participation of the appellant in the oppression of the respondent as a shareholder and creditor of SREL and the participation of the appellant in the civil conspiracy against the interests of the respondent, was entitled to the benefit of an order, in addition, from the trial judge only to the extent that the respondent has demonstrated actual loss as a consequence of the actions of the appellant. In setting aside the award by the trial judge of general damages in the amount of $550,000.00, this Court should substitute an order that, bearing in mind difficulties arising from the passage of time, is most likely to achieve the result that ought to have been ordered by the trial judge.”

“Accordingly, it is ordered [that]: (1) That portion of the order of the trial judge awarding general damages against the appellant personally, in the amount of $550,000.00, is set aside; (2) The respondent shall recover from the appellant the sum of $99,000.00 to the extent only of the portion of that sum that it has not recovered pursuant to the judgment of the courts of the State of Oklahoma in the United States of America; and (3) The respondent shall recover, as damages for the tort of civil conspiracy, the sum of $435,000.00 to the extent, and only to the extent, that it demonstrates to the trial judge that the value of the benefit, direct and indirect, to which it was entitled, immediately after the date of the decision of the trial judge, as a consequence of the rescission of the Permit Transfer and the vesting in it of the 75% of the shares of SREL, which it acquired at the public auction held pursuant to the pledge agreement, is less than the total of the $435,000.00 deficiency on the Note, plus the amount it expended to acquire the 75% of the SREL shares at the public auctions.” [Para. 65]

Citation: American Reserve Energy Corp. v. McDorman, 2002 A.C.W.S.J. 8801; 117 A.C.W.S. (3d) 82 (Newf. & Lab. Ct. App. October 2, 2002).

CRIMINAL LAW

Eighth Circuit rejects foreign criminal defendants’ claims that violation of Vienna Convention on Consular Relations rendered their inculpatory statements inadmissible or, in any event, barred U.S. Government from seeking death penalty

Arboleda Ortiz, German Sinisterra and Plutarco Tello (defendants) were part of the cocaine distribution ring ran by Edwin Hinestroza in the Kansas City area. The shipments came from “La Oficina” (“the office”) in Colombia via Mexico. When Julian Colon and Heberth Andres Borja-Molina (Borja) allegedly stole $240,000 of drug proceeds from Hinestroza’s apartment, the three defendants abducted and shot them. Borja only pretended to be dead, eventually escaping from the trunk of the car where the defendants had left him with Colon’s corpse.

Officials arrested the defendants within hours and advised each one of his Miranda rights. When the police found out that defendants were not U.S. citizens, they explained their rights to have their consulate notified pursuant to the Vienna Convention. Sinisterra did not respond when advised of his Convention rights. Moreover, Ortiz later claimed that the police had not clearly explained to him about his rights under the Convention. Finally, the Government concedes that it had failed to so advise Tello.

At trial, the defendants presented evidence of their limited abilities to speak and understand English, about one of the police officer’s limited Spanish language abilities, and about several misunderstandings which had taken place. The former Colombian Consul General in Chicago, IL, testified that the police had failed to notify him about the defendants’ arrests. The district court, however, found that the defendants had understood their rights and had voluntarily waived them.

Defendants appealed their convictions (two of them death sentences) for murder, drug trafficking and other offenses on the grounds that police had obtained their inculpatory statements in violation of Miranda and the Vienna Convention on Consular Relations, Article 36 [21 U.S.T. 77; T.I.A.S. 6820; 596 U.N.T.S. 261; entered into force for U.S. December 24, 1969]. The U.S. Court of Appeals for the Eighth Circuit, however, affirms.

In the Court’s view, the Vienna Convention appears to grant judicially enforceable rights. “In particular, the provision in Article 36(1)(b) that ‘the ... authorities [of the receiving State] shall inform the person concerned without delay of his rights ... appears to recognize that the person detained does have rights under the Treaty. The antecedent of the pronoun ‘his’ in this sentence is ‘the person arrested, in prison, custody or detention,’ a phrase occurring in the immediately preceding sentence.”

“As we noted ..., the federal courts are not in agreement as to whether Article 36 of the Convention creates a right enforceable by an individual who has been arrested. [Cites] The Supreme Court has not directly addressed the issue, though it has said that the Convention ‘arguably confers on an individual the right to consular assistance following an arrest.’ [Slip op. 26-27]

Here, the defendants maintained that the Convention violation makes their inculpatory statements per se inadmissible regardless of whether they were voluntary. Assuming arguendo that the Convention does create individually enforceable rights, the Court disagrees. “In other words, there is no evidence that defendants, if they had been given proper consular access, would have chosen not to waive their Miranda rights. So far as we can tell, the course of the trial would not have been changed at all.”

“Furthermore, the Vienna Convention does not require that interrogation cease until consular contact is made. The interrogation in this case occurred on a Sunday. If defendants had been allowed to telephone the consul, they could not have reached him. The most that could have been done was to leave a message on the consulate’s voice mail, and the consul would have returned the call the next day. By that time, defendants, fully informed of their rights under Miranda, had already confessed. In other words, defendants have shown no prejudice, and therefore the violation of the Vienna Convention is of no avail to them, even if the violation is assertable by an individual detained person.” [Slip op. 28-29]

The Eighth Circuit also rejects the defendants’ argument that the purported violation of the Convention bars the Government from seeking the death penalty. The Court sees no causal or logical connection between the penalty imposed and a Convention violation. The Convention itself does not address the adequacy of penalties, and this Court should not try to create such a remedy out of thin air.

Citation: United States v. Ortiz, 2002 WL 31454772, Nos. 00-4082WM, 00-4083WM & 01-1136WM (8th Cir. November 5, 2002).

INTERNET

In an in rem action by U.S. toy manufacturer against several internet domain names for using its trademarks without authorization, Second Circuit explains jurisdictional grant in Anticybersquatting Consumer Protection Act of 1999 (ACPA) requiring action in judicial district of domain registrar, noting that this also satisfies international comity when applied to Australian domain registrant

Mattel is a large U.S. toy manufacturer using a variety of trademarked names for its toys, including “Barbie,” “Hot Wheels,” and “Matchbox.” Objecting to using the names of its toys in 57 internet domain names, Mattel brought a federal in rem action against the domain names under ACPA [15 U.S.C.S. Section 1125(d)] in the Southern District of New York. The contested domain names include “captainbarbie.com,” “barbie-club.com,” “matchboxonline.com,” and “casinohotwheel.com.” Defendant(s) had registered the 57 domain names through various domain registrars in Maryland, Virginia, New York, and California.

In cases where a federal court cannot secure personal jurisdiction over a defendant, ACPA permits the owner of a mark to bring an in rem action against a domain name that “violates any right of the owner of a mark registered in the Patent and Trademark Office, or protected under subsection (a) or (c) of this section.” [15 U.S.C. Section 1125(d)(2)(A)(I)]

The district court dismissed Mattel’s action because the domain names at issue were not registered within the district, and the court thus lacked in rem jurisdiction. Mattel appealed the dismissal.

The U.S. Court of Appeals for the Second Circuit affirms. It holds (1) that subsection (d)(2)(A) of the ACPA provides for in rem jurisdiction only in the judicial district in which the registrar, registry, or other domain-name authority that registered or assigned the disputed domain name is located, and (2) that subsection (d)(2)(C) odes not provide an additional basis for in rem jurisdiction.

The Court explains: “The issue of in rem jurisdiction, which is one of first impression in this Circuit, presents greater complexities. The ACPA, under 15 U.S.C. Section 1125(d)(1), allows a trademark owner to pursue an in personam civil action against an alleged trademark infringer. If the court finds that in personam jurisdiction is not available or that the infringer cannot be located, Section 1125(d)(2) allows the trademark owner to proceed against the domain name itself. Id. Section 1125(d)(2)(A)(ii). This in rem jurisdiction was provided in part to address the situation where ‘a non-U.S. resident cybersquats on a domain name that infringes upon a U.S. trademark.’145 Cong. Rec. H10, 823, H10, 826 (Oct. 26, 1999) ...”

“The registrant of captainbarbie.com is an Australian entity over which Mattel alleged in its complaint (and the district court apparently found) that Mattel was ‘unable to obtain personal jurisdiction.’ Consequently, Mattel sought to obtain in rem jurisdiction over captainbarbie.com pursuant to Section 1125(d)(2)(A)(ii)(I). Because the parties effectively agree that in rem jurisdiction is available in some judicial district within the United States, we turn to the question of whether the Southern District of New York is a proper judicial district for entertaining this in rem action.” [Slip op. 14-15]

The Court notes (but does not decide) that there is an issue of whether an internet domain registration may be enough, by itself, to establish personal jurisdiction in that district. Other courts have expressly or tacitly found that ACPA plaintiffs could not obtain personal jurisdiction over non-U.S. persons or entities whose only contact with the United States was registering a domain name here. The Court further notes during his analysis of ACPA’s legislative history that Congress plainly sought to allay any concerns that ACPA’s in rem jurisdiction might offend due process or principles of international comity.

“‘This type of in rem jurisdiction still requires a nexus based upon a U.S. registry or registrar [that] would not offend international comity ... Finally, this jurisdiction does not offend due process, since the property, and only the property is the subject of the jurisdiction, not other substantive personal rights of any individual defendant.’H.R. Rep. No. 106-412, at 14 (1999).” [Slip op. 24]

Thus, Congress considered the “registry or registrar” to provide a “nexus” for in rem jurisdiction under the ACPA. Thus, it is the presence of the domain name itself (“the property”) in the judicial district in which the registry or registrar is located that provides the basis for the in rem action and satisfies due process and international comity.

As the Court concludes: “In sum, we hold that the ACPA’s basic in rem jurisdictional grant, contained in subsection (d)(2)(A), contemplates exclusively a judicial district within which the registrar or other domain-name authority is located. A plaintiff must initiate an in rem action by filing a complaint in that judicial district and no other. Upon receiving proper written notification that the complaint has been filed, the domain-name authority must deposit with the court documentation ‘sufficient to establish the court’s control and authority regarding the disposition of ... the domain name,’ as required by subsection (d)(2)(D).”

“This combination of filing and depositing rules encompasses the basic, mandatory procedure for bringing and maintaining an in rem action under the ACPA. Subsection (d)(2)(C) contributes to this scheme by descriptively summarizing the domain name’s legal situs as established and defined in the procedures set forth in subsections (d)(2)(A) and (d)(2)(D). Accordingly, we affirm the district court’s conclusion that it did not have in rem jurisdiction over the Domain Names in this action.” [Slip op. 35-36]

Citation: Mattel, Inc. v. Barbie-Club.com, 2002 WL 31478839, No. 01-7680 (2d Cir. November 7, 2002).

SOVEREIGN IMMUNITY

Ninth Circuit decides in dispute over assets of Philippine’s late President Marcos that Philippines and its instrumentalities are immune from suit under FSIA, and stays further proceedings so that contested matters can be resolved in other ways

In 1972, the New York office of the investment company, Merrill Lynch, received about $2 million belonging to the late Philippine President Ferdinand E. Marcos and held indirectly through a Panamanian company. Several creditors then filed claims to the assets, and a Philippine government agency asked that Merrill Lynch put the assets in escrow with the Philippine National Bank.

Merrill Lynch filed this federal interpleader action in 2000 as a disinterested stakeholder, turning the assets over to the district court so that it could adjudicate the various competing claims. The defendants included Philippine victims of human rights violations, the Republic of the Philippines (“Republic”), and the Presidential Commission on Good Government (PCGG), a government instrumentality created by then-President Corazon Aquino to recover assets wrongfully acquired by President Marcos.

The Republic and the PCGG moved to dismiss the interpleader, arguing that they are entitled to sovereign immunity under the Foreign Sovereign Immunities Act of 1976 (FSIA) [28 U.S.C. Section 1604]. One of the creditors moved to dismiss the Republic and the PCGG, alleging that they are not real parties in interest. This motion had severe implications as for the merits of the Republic’s claim to the assets and its claim to sovereign immunity.

The Republic and the PCGG then moved the court to find them immune and to dismiss the action because they claimed to be indispensable parties. Based on the creditors’ motion (and without ruling on sovereign immunity), the district court dismissed the Republic and the PCGG on the basis that they are not real parties in interest. The Republic and the PCGG appealed.

The U.S. Court of Appeals for the Ninth Circuit holds that the district court erred in failing first to have dealt with the sovereign immunity claims of the Republic and the PCGG. It remands their cases to the lower court for dismissal based on the FSIA.

The FSIA provides the sole basis for subject matter jurisdiction over foreign states and their agents or instrumentalities. See 28 U.S.C. Section1604. Here, the creditors do not dispute that the Republic and the PCGG are, respectively, a foreign state and its instrumentality. The creditors thus have the burden of showing that one of the exceptions to sovereign immunity applies in this case. The only potentially applicable exceptions here are the “successor” exception in 28 U.S.C. Section 1605(a)(4), and the “implied waiver” exception found in 28 U.S.C. Section 1605(a)(1).

The “successor” exception provides that a foreign state is not immune if “rights in property in the United States acquired by succession or gift or rights in immovable property situated in the United States are at issue.” The Court rejects the creditors’ argument that this exception applies to the Republic and the PCGG; the exception is applicable only when the sovereign claims to be a successor to a private party.

“The FSIA’s exceptions focus on actions taken by, or against, a foreign sovereign. For example, Section 1605(a)(1) provides that a foreign state is not entitled to immunity if the state either explicitly or implicitly waives it. Another exception provides that a foreign state does not have immunity when it carries out commercial activity in the United States. 28 U.S.C. Section 1605(a)(2).”

“... The legislative history to the FSIA also indicates that the ‘successor’ exception is concerned with rights acquired by a foreign sovereign. ... Thus, because the Republic is not a party by virtue of its succession to a private party’s claim or putative liability, the exception does not apply in this case.”

“... The Restatement (Third) of the Foreign Relations Law of the United States declares that under international law, ‘a state is not immune from the jurisdiction of the courts of another state with respect to claims ... to property, whether tangible or intangible, acquired by the state through succession or gift.’ Restatement (Third) Section 455(1)(b) (1987). ... The focus is thus on whether the foreign state has acquired by succession, not whether any party to the action has acquired a right by succession.” [Slip op. 9-11]

Neither does the “implied waiver” exception of Section 1605(a)(1) apply here. Construing it narrowly, the courts apply it for the most part where a foreign state has agreed (1) that it will arbitrate in the U.S.; (2) or that U.S. law governs its contract or (3) where a foreign state has filed a responsive pleading in an FSIA case without raising sovereign immunity. None of these situations exist in this case.

The Court thus concludes that the FSIA preserves immunity from suit as to the Republic and the PCGG. The Court also tells the lower court to stay further proceedings so that the parties in interest may resolve these matters elsewhere, e.g., by litigation in the Philippines.

Citation: In re Republic of the Philippines, 309 F.3d 1143 (9th Cir. 2002).

WORLD TRADE ORGANIZATION

In its preliminary report regarding U.S. countervailing duties on imports of Canadian softwood lumber, WTO dispute settlement panel disapproves U.S. imposition of provisional measures but exonerates U.S. laws and regulations on expedited and administrative review

In August 2001, Canada asked for consultations with the U.S. about the countervailing duty determination and the preliminary critical circumstances determination made by the U.S. Department of Commerce (DOC) on August 9, 2001, with respect to certain softwood lumber from Canada. When the consultations were unsuccessful, Canada asked the WTO to set up a dispute settlement panel (DSP). The WTO officially adopted the panel Report’s findings on November 1, 2002.

In particular, the DSP first concludes, inter alia, that the DOC had failed to determine the existence and amount of benefit which the producers of the softwood lumber may have gotten based on prevailing market conditions in Canada. Articles 1.1(b), 14, and 14(d) of the Subsidies and Countervailing Measures (SCM) requires this.

Secondly, the DOC failed to look into whether a benefit was passed through the unrelated upstream producers of log inputs to the downstream producers of the lumber. This prevented the DOC from showing that certain lumber producers had received a benefit. Therefore, the DOC’s imposition of provisional measures based on the preliminary countervailing duty determination did not square with U.S. obligations under the above provisions plus Article 17.1(b) of the SCM Agreement.

On the other hand, the WTO concluded that the challenged U.S. laws and regulations on expedited and administrative review are not inconsistent with U.S. obligations under Articles 19 and 21 of the SCM Agreement. Accordingly, the DSP rejects Canada’s claim that the U.S. has failed to ensure that its laws and regulations conform to its WTO obligations.

[Editorial Note: The U.S. Trade Representative’s press release on this matter points out that the U.S. has already refunded preliminary countervailing duties of almost $1 billion to Canadian lumber producers for legal reasons unrelated to this WTO proceeding. The DOC announced a final decision on countervailing duties in May 2002, and Canada is challenging those as well before the WTO.]

Citation: United States - Preliminary Determinations with Respect to Certain Softwood Lumber from Canada (WT/DS236/R) (27 September 2002). [Report is available on WTO website at “www.wto.org”; see U.S. Trade Representative press release 02-104 (November 1, 2002).]

EC Commission approves purchase of French mail order firm by Staples, Inc. The European Commission has recently cleared Staples, Inc., the U.S. based office supply company, to buy Guilbert S.A., a French mail order outfit and a division of Pinault Printemps-Redoute, S.A. Guilbert is the major mail order distributor in France, Spain and Italy. After the Commission had analyzed the fact that the activities of the two companies duplicate each other to some degree in Great Britain, it finally decided that this element was not sufficient to raise an issue of market dominance. Staples believes that the arrangement will help it overcome the difficulties it has already met in setting up its own office supply stores in Europe. Citation: Associated Press (Online) News Report, October 14, 2002, 17:25 G.M.T.

U.S. Treasury strengthens regulations against money laundering. The U.S. Department of the Treasury, Financial Crimes Enforcement Network (FinCEN), has amended its interim final rule on money laundering. For certain financial institutions, it temporarily defers compliance with the requirements of Section 352 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. (The temporary deferrals are to enable FinCEN and the Treasury to continue studying the money-laundering risks that financial institutions pose.) The Act amends the anti-money laundering provisions of the Bank Secrecy Act (BSA) (see 31 U.S.C. subchapter II of chapter 53) better to control international money laundering and the financing of terrorism. Under Section 352(a), every financial institution will have to set up an anti-money laundering program. At a minimum, it must include: (1) internal policies, procedures and controls; (2) a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test programs. Citation: 67 Federal Register 67547 (November 6, 2002).

United States joins organization aimed at banning “conflict diamonds” from international commerce. On November 5, 2002, the U.S. became a partner in the “Kimberley Process” at a conference in Interlaken, Switzerland. Led by South Africa, the Process now has 48 nations committed to the effort to eliminate so-called conflict diamonds from international trade starting on January 1, 2003. Two years of intensive cooperation among world governments (as well as the diamond industry and civil society) led up to this “Interlaken Declaration.” The goal is to prevent the use of diamonds to fund various rebel movements which have terrorized innocent civilians and destabilized governments in many parts of Africa. To that end, the U. N. General Assembly has endorsed the Process’s “rough diamond certification system.” In the view of the U.S., the Kimberley Process will also make it easier for African governments to use their diamond resources to benefit their own people, both economically and socially. It will also protect the lawful diamond industry which produces the vast majority of rough diamonds traded on world markets. Citation: Press Statement by Richard Boucher, U.S. State Dept. Spokesman, Washington, D. C., November 5, 2002. [For other press statements, see http://www.state.gov/r/pa/prs/ps/.]

U.S. Treasury regulations order more corporate disclosure about offshore tax moves. If the Acme Widget Company obtains a Bermuda address and holds its board meetings in a tax haven such as Barbados, it can avoid paying U.S. taxes on its profits. After Congress failed to act on the tax haven problem as promised, the U.S. Treasury Department, on November 12, 2002, put out regulations dealing with the subject. When U.S. companies move key corporate functions to offshore havens, the new rules demand that they report the facts to their shareholders and to the Internal Revenue Service. According to federal law, such companies already have to pay capital gains taxes but most of them manage to impose that duty upon their shareholders. Some tax experts believe that the new regulations -- by making sure that shareholders know what is going on -- may discourage some companies from engaging in offshore moves. The rules also require American companies to notify their shareholders if a foreign company takes them over or if they take part in major dealings that could place a tax burden on shareholders. Citation: 67 Federal Register 69468 (November 18, 2002); The New York Times, Late Edition - Final, November 13, 2002, Section C, page 2, column 1 [byline of David Cay Johnston].

U.S. President extends national emergencies with respect to Sudan and Colombia for another year. U.S. President George W. Bush has issued a notice that continues for another year the national emergency regarding the Sudan he had proclaimed pursuant to the International Emergency Economic Powers Act (IEEPA) (50 U.S.C. Sections 1701-1706). Executive Order 13067 first declared this emergency on November 3, 1997. – In a related matter, the President has prolonged the national emergency with regard to Colombia for another year because its ongoing narcotics trafficking problems continue severely to affect the U.S. Executive Order 12978 first announced this emergency on October 21, 1995. The recent notice explains that the underlying Executive Order blocks all property and interests in property which are within U.S. control and which relate to Colombian narcotics trafficking or to individual traffickers. Citation: 67 Federal Register 66525 (October 31, 2002) [Sudan] & 64307 (October 18, 2002) [Colombia].

Philip Morris sanctioned for breaking Australia’s anti-advertising laws. On November 8, 2002, a Court in Sydney fined Philip Morris $53,200, making it the first tobacco company in Australia to be penalized for advertising its products. Expressing regret, the company pleaded guilty to promoting its cigarettes to young women at a Sydney fashion awards event it had sponsored in December 2000. The Court pointed out that Philip Morris had festooned the fashion show locale with its company colors and had set up special stands where models were selling its cigarettes. Referred to as a “dark market” by cigarette companies, Australia has some of the world’s strictest tobacco advertising laws. New South Wales, for example, bans all tobacco ads in public places and (along with two other states, Tasmania and Victoria) in places where tobacco products are on sale. The Health Minister of New South Wales admitted that the fine imposed would be a drop in the bucket for a multinational company. Therefore, he is looking into the possibility of having much stiffer penalties enacted in the future. Citations: Associated Press (Online) News Report, November 8, 2002, 18:34 G.M.T.

U.S. and EU amend technical annexes to their Agreement on Mutual Recognition of technical issues to facilitate trade. The EU has published amendments to the sectoral annexes of the Agreement on mutual recognition between the European Community and the United States of America. A special Joint Committee introduced them. The amendments bring about three major changes: (1) they set a five-year transition period for medical devices; (2) they add an additional U.S. conformity assessment body to deal with telecommunications equipment; and (3) they add additional U.S. and EU conformity assessment bodies to coordinate electromagnetic compatibility. Citation: 2002 O.J. of European Communities (L 302) 30-34, November 6, 2002.

U.S. and Philippines sign Tropical Forest Agreement. On September 19, 2002, pursuant to the Tropical Forest Conservation Act (TFCA) of 1998, the U.S. and the Philippines signed a Tropical Forest Agreement to conserve tropical forests and prevent illegal logging in the Philippines. Under this Agreement, the Philippines will receive $8.2 million for forest conservation over the next 14 years. Also, the U.S. will re-schedule a portion of the Philippines’ debt, with the saved money to be put into a Tropical Forest Conservation Fund and administered jointly by representatives of both countries. – Since the enactment of the TFCA, the U.S. has signed forest conservation agreements also with Bangladesh, Belize, El Salvador, and Peru. Citation: U.S. Department of State Media Note of October 1, 2002.

Additional documentation requirements imposed for shipments to the U.S. The U.S. Department of the Treasury, U.S. Customs Service, has issued a final rule to require the presentation of vessel cargo declarations to customs before cargo is laden aboard vessels abroad for transport to the U.S. The declarations must include all inward foreign cargo aboard the vessel regardless of the intended U.S. port of discharge. The purpose is to enable the U.S. Customs Service to evaluate the risk that the cargo may include items for weapons of mass destruction, and to facilitate the prompt release once the cargo arrives in the U.S. Citation: 67 Federal Register 66318 (October 31, 2002).

U.S. and Hong Kong sign Aviation Agreement. On October 19, 2002, the U.S. and Hong Kong agreed to liberalize aviation. It is not an Open Skies agreement, but includes similar benefits, such as codesharing and an increased number of flights for cargo and passengers. Citation: U.S. Department of State Media Note of October 21, 2002.