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.

2000 International Law Update, Volume 6, Number 10 (October).

FORUM NON CONVENIENS

Ontario Court of Appeal overturns discretionary stay of suit by Minnesota insured against her Minnesota insurer entered by provincial court on grounds that “Power of Attorney and Undertaking” previously filed by insurer in British Columbia was enforceable submission to suit in any province of Canada

Ginger M. Berg, a minor resident of Minnesota, was riding in a Minnesota automobile in Ontario when an accident took place with a car owned and driven by an Ontario resident. The Farm Bureau Mutual Insurance Company (FBMI), a Minnesota corporation with its head office in Iowa, provided auto accident coverage for Ms. Berg and has paid her the benefits she was entitled to under the policy.

Ms. Berg (appellant) next sued FBMI in an Ontario court, claiming she was entitled to the statutory accident benefits (SABs) from respondent pursuant to the minimum limits specified under the Ontario Auto Insurance Rate Stability Act of 1996. In August 1999, the court of first instance granted respondent’s motion to stay the proceedings, holding that Minnesota was the appropriate forum because that state had the closest and most real connection with the insurance contract.

Ms. Berg appealed and argued that the lower court had mistakenly disregarded the “Power of Attorney and Undertaking “ (PAU) which the respondent had signed and filed in British Columbia in 1964. Alternatively, appellant contended that there was error in ruling that Minnesota was the proper forum to adjudicate the claim for Ontario SABs.

The Ontario Court of Appeals allows the appeal and sets aside the stay. “A plain reading of the PAU indicates that the respondent insurer agreed to accept service and to appear in any action against it in any province or territory in which the action had been instituted, in this case, Ontario. The respondent submits that this undertaking applies to the situation where its insured is sued and that it does not apply to the situation where the insurance company is being sued by its own insured. That is not what the PAU says. Paragraph A of the PAU states that the respondent undertakes ‘To appear in any action or proceeding against it or its insured ...’ ‘It’ refers to the Farm Bureau Mutual Insurance Company, the respondent.”

“The respondent's submission must accordingly fail. The effect of the PAU is that the respondent has agreed to the assumption of jurisdiction over it when sued in a province of Canada. In designating the Registrar of Motor Vehicles as its agent to accept service on its behalf, the respondent has also excluded the necessity for service outside the jurisdiction.” [Slip op. 4-5]

The Court then compares the elements of forum non conveniens analysis with the terms of the PAU agreement. “Here, the parties are both resident in Minnesota and the evidence on any issues of fact is situated or more readily available there. This could be a reason for not enforcing the PAU. The factors connecting the parties to Minnesota are important ones to consider in deciding the most appropriate forum for the resolution of a claim. [Cits.] The rationale underlying consideration of connecting factors and, in particular, the factor of juridical advantage is, however, to give effect to the reasonable expectation of the parties respecting the outcome in the event of litigation. (Cit.) Here, the undertaking signed by the respondent is indicative of its reasonable expectation.” [Slip op. 5]

In the Court’s view, a PAU confirms to the insured that courts will recognize the validity of the policy in other participating jurisdictions. Thus, it guarantees a person injured in an Ontario accident the same SABs irrespective of whether the parties had executed the insurance contract in Ontario or in another jurisdiction.

“If the appellant's action is allowed to proceed in Ontario, the PAU makes Ontario law applicable and the appellant will be entitled to SABs. The PAU precludes the respondent from asserting the defence that its policy does not include SABs coverage. (Cit.) If, on the other hand, a stay is granted and the appellant is forced to sue in Minnesota, the issue of whether the respondent is obliged to pay SABs is very much a live issue. The PAU provides that the law to be applied is that of the province where the ‘action or proceeding may be initiated.’ It could be argued that, because of the stay, the action may not be initiated in Ontario. There could, accordingly, be a significant loss of juridical advantage to the appellant.” [Slip op. 7-8]

Citation: Berg v. Farm Bureau Mutual Insurance Company, Docket No. C32747, 2000 Ont. C.A. LEXIS 374 (Ont. Ct. App. July 21, 2000).

JURISDICTION (PERSONAL)

In action brought by British company for alleged violation of trade secrets by U.S. and Taiwanese companies, Third Circuit orders dismissal of claims against Taiwanese company for lack of personal jurisdiction although defendant contracted with U.S. company for manufacture of chemical vessels and sells products in the U.S.

BP Chemicals Ltd. (BP) (a British company) filed a suit in New Jersey federal court against Formosa Chemical & Fibre Corporation (FCFC) (a Taiwanese corporation), and Joseph Oat Corporation (JOC) (a Pennsylvania corporation with its principal place of business in New Jersey). BP alleged that the defendants violated BP’s trade secrets regarding its chemical process for making acetic acid. In particular, BP alleged that the defendants had copied parts of an acetic acid manufacturing plant that BP’s predecessor, Monsanto, had provided to China Petrochemical Development Corporation (CPDC). BP also alleged that FCFC and JOC contracted to have JOC manufacture some chemical process vessels based on misappropriated technical specifications for use in the building of an acetic acid plant in Taiwan.

A publicly-traded Taiwanese company with its principal place of business in Taipei, Taiwan, FCFC owns 3.51% of the stock of a U.S. company. The contract between FCFC and JOC for the manufacture of the disputed chemical vessels resulted from a bid where JOC offered to make them for the lowest price. All meetings between FCFC and equipment vendors took place in Taiwan and no FCFC personnel visited the U.S. on this matter. It also appears that FCFC has never advertised its products in the U.S. FCFC did have other contacts with the U.S., including the sale of rayon and fiber to U.S. customers. Taiwanese agents, however, had carried out these sales.

FCFC moved to dismiss the claims against it for lack of personal jurisdiction. The district court ultimately denied the motion and granted BP’s motion for injunctive relief. Finding that the lower court did not have personal jurisdiction over FCFC, the U.S. Court of Appeals for the Third Circuit reverses and remands for further proceedings against JOC only.

The Court concludes that FCFC lacked enough minimum contacts with New Jersey to conform to its long-arm statute or to the federal due process clause. Nor did it have enough contacts with the U.S. as a whole to permit jurisdiction over FCFC under Fed. R. Civ. Pro. 4(k)(2). The Rule seemingly provides for jurisdiction over foreign defendants for claims arising under federal law when the defendant has sufficient contacts with the U.S. as a whole to justify the imposition of U.S. law though defendant lacks enough links to satisfy the due process concerns of the long-arm statute of any particular state.

“Specific personal jurisdiction” exists when the defendant has purposefully directed his activities at residents of the forum and the litigation results from alleged injuries that arise out of or related to those activities. “General personal jurisdiction” exists when the defendant’s contacts with the forum, whether or not related to the litigation, are substantial and systematic.

Here, FCFC’s contacts with the U.S. do not give rise to specific jurisdiction. “In this case, FCFC’s alleged misappropriation and improper use of BP’s trade secrets have occurred in Taiwan. The primary alleged injury to BP has occurred and continues to occur in Great Britain [where the owner of the trade secret resides] ... Thus, the primary tortious conduct giving rise to BP’s claim against FCFC and to the injury caused thereby is unrelated to the United States.”

“The only FCFC contacts with the United States that are in any way related to BP’s claim against it are that (1) it placed orders in Taiwan with eight United States based equipment suppliers to enable it to build the offending plant in Taiwan, (2) in furtherance of those orders it has sent correspondence from Taiwan into the United States, and (3) in one of those eight orders it agreed to arbitrate with that supplier in New York. Thus, in substance, this is a case where FCFC availed itself of the assistance of eight U.S. based companies who solicited its business in Taiwan in order to build a plant in Taiwan allegedly with resulting injury to BP in Great Britain.” [Slip Op. 15 - 16]

Neither is general personal jurisdiction available in this case. Even though FCFC exports some products to the U.S., it does not have personnel or facilities here, and it has never advertised its products or solicited business in the U.S. Therefore, FCFC has no continuous business presence in the U.S., and is not subject to general personal jurisdiction.

Citation: BP Chemicals Ltd. v. Formosa Chemical & Fibre Corp., Nos. 98-5468/98-5469 and 99-5423/99-5451/99-5452, 2000 WL 1460760 (3rd Cir. October 3, 2000).

JURISDICTION(PROPER FORUM)

In libel suit by Messrs. Berezovsky and Glouchkov against Forbes magazine, majority of House of Lords panel holds that, based on number of business contacts between plaintiffs and England, English court was proper forum in which to assess reputation damages rather than United States or Russian Federation

In the 1990s, Forbes magazine gave substantial space to reporting on its investigations into the situation in post-Soviet Russia, much of it exposing the dramatic growth of organized crime and corruption. Forbes focused its coverage on Boris Berezovsky and Nicolai Glouchkov during 1996. Berezovsky is a businessman with wide interests in Russian business sectors such as cars, oil, media and finance who became Deputy Secretary of the Security Council of the Russian Federation in October of 1996. Glouchkov was the First Deputy Manager of Aeroflot in December 1996.

The December 30, 1996 issue of Forbes use the following table of contents caption: "Is he the Godfather of the Kremlin? Power, Politics, Murder. Boris Berezovsky can teach the guys in Sicily a thing or two." On the editorial page, James W. Michaels, the editor of Forbes, wrote: “Berezovsky stands tall as one of the most powerful men in Russia. Behind him lies a trail of corpses, uncollectible debts and competitors terrified for their lives.”

In the article Forbes described Mr. Glouchkov as follows: “This gentleman has an interesting background. He was convicted in 1982 under Article 89 of the Russian criminal code (theft of state property). Later [Glouchkov] served as head of finance for Avtovaz and was one of the founders of Logovaz. In short, an associate of Berezovsky. Are [Glouchkov] and Berezovsky in cahoots to siphon money from Aeroflot? The parallels with Avtovaz are certainly striking."

This issue of Forbes had a total of subscriptions and newsstand sales of 785,710 in the U.S. and Canada and a total of 1,915 in England and Wales. Taken with Internet access, it is agreed that about 6,000 readers would have seen the magazine in the latter jurisdictions.

On February 1997, Messrs Berezovsky and Glouchkov (plaintiffs) issued separate proceedings in an English court for libel damages and injunctions against Forbes, Inc. and Mr. Michaels. Both plaintiffs limited their damage claims to the reputation damage done by the publication of Forbes in England and Wales via distribution of copies of the magazine and through its appearance on the Internet.

Plaintiffs then applied for leave to serve the writs outside of England under R.S.C. Order 11. It allows such service where "the claim is founded on a tort and the damage was sustained, or resulted from an act committed, within the jurisdiction" but only where the case is “a proper one for service out of the jurisdiction.” Defendants then asked the court to set aside the writs and either to dismiss or to stay the actions on the grounds that either the U.S. or Russia were the appropriate jurisdictions for trying these cases. Much factual material was exchanged along with testimony on Russian and American law.

On December 19, 1997, the trial judge found the links between plaintiffs and the jurisdiction “tenuous.” He decided that Russia was the more suitable forum and required defendants to submit to and to abide by the judgment of the Russian courts. On plaintiffs’ filing in the Court of Appeal, both sides offered additional evidence to the appellate court which was accepted into the record. The Court ultimately allowed the appeals, holding that England was the appropriate jurisdiction for trial.

On appeal to the House of Lords, the House dismisses the appeal in a three-to-two division of opinion. In the course of the speeches before the House, six main issues developed: (1) Was the Court of Appeal wrong in admitting the plaintiffs' new evidence? (2) Should the House of Lords grant defendants’ petition to produce new evidence on the appeal to the House and, if so, should the House grant a counter‑ petition by the plaintiffs? (3) Depending on the answers to issues (1) and (2), objectively, was is the realistic view on the primary issue of fact, i.e., the plaintiffs' links to England and their reputations here? (4) Did the Court of Appeal correctly apply the test in Spiliada Maritime Corporation v. Cansulex Ltd. [1987] A.C. 460.? (5) Was the Court of Appeal entitled to interfere with the trial judge’s exercise of his discretion? (6) Even if the Court of Appeal was right in respect of Mr. Berezovsky's action, what is the position with regard to Mr. Glouchkov?

The majority first rules that the new evidence admitted by the Court of Appeal amplified a case already summarized in prior affidavits and thus the Court acted “well within its discretion.”  It holds otherwise as to the new evidence bearing on justification which defendants belatedly proffered to the House. Although the trial judge had remarked unfavorably on the defendants’ lack of evidence on this defense as early as October 1997, defendants did not present such material to the Court of Appeal, delaying until shortly before the House hearing before doing so. No warrant for admitting the new material justifies this somewhat “exceptional course” in the House of Lords.

The materials plaintiffs submitted below alleged that Mr. Berezovsky visited London for business and personal reasons on 31 occasions during the relevant period, and that he kept an apartment in London for his estranged wife and two children. Three independent deponents declared that financial executives knew of the Forbes article and that it had discouraged them from “entering or continuing” negotiations with Mr. Berezovsky in London. Hence the Court of Appeal rightly concluded that, given all the evidence, he had "a substantial connection with this country, and an important business reputation to protect here."

Mr. Glouchkov’s links to the U.K. were somewhat less but still far from “tenuous.” He has kept a flat in London since 1993 and made frequent visits to such London offices as the World Bank, Aeroflot, an insurance brokerage firm, the European Bank for Reconstruction and Development, the Chase Manhattan Bank, Citibank and Kredietbank. The majority looks upon these activities as constituting significant connections to the U.K.

As the majority points out, there are only three forum choices in this case, the U.K., the U.S., or Russia. “Moreover, there are two substantial indications pointing to Russia not being the appropriate jurisdiction to try the action. The first is that only 19 copies were distributed in Russia. Secondly, and most importantly, on the evidence adduced by Forbes about the judicial system in Russia, it is clear that a judgment in favour of the plaintiffs in Russia will not be seen to redress the damage to the reputations of the plaintiffs in England. Russia cannot therefore realistically be treated as an appropriate forum where the ends of justice can be achieved.”

“In the alternative, counsel for Forbes argued that the US is a more appropriate jurisdiction for the trial of the action. There was a large distribution of the magazine in the US. It is a jurisdiction where libel actions can be effectively and justly tried. On the other hand, the connections of both plaintiffs with the US are minimal. They cannot realistically claim to have reputations which need protection in the US. It is therefore not an appropriate forum.” [N/A] Thus, the U.K. is the most appropriate jurisdiction under Rule 11.

As to issue (5), the majority concludes that the trial judge had “misdirected himself” as to the English links, thus flawing the exercise of his discretion. This properly opened his ruling to intervention by the Court of Appeal. Finally, the majority rejects defendants’ contentions that the appeal as to Mr. Glouchkov should succeed in any event. Not only did defendant fail to differentiate between plaintiffs in the Court of Appeal but also the point lacks merit. Thus, in the majority’s view, the House of Lords should dismiss both appeals.

Citation: Berezovsky v. Michaels, 2000 WL 544123 (HL), [2000] 2 All E. R. 986 (House of Lords, May 11, 2000).

JURISDICTION(SUBJECT MATTER)

Where Second Circuit denied rehearing en banc of case holding that citizens of UK “overseas territories” did not fall within the alienage jurisdiction of federal courts, strong dissent contends that majority opinion makes Circuit only one that leaves such citizens “stateless”

Federal courts may, under their alienage jurisdiction, hear cases or controversies between “citizens of a State and citizens or subjects of a foreign state.” 28 U.S.C. Section 1332(a)(2). In Matimak Trading Co. v. Khaliy, 118 F.3d 76 (2d Cir. 1997), cert. denied, 522 U.S. 1091 (1998), the Second Circuit held that Bermuda corporations and a Bermuda citizen were not “citizens or subjects of a foreign state,” and a dispute involving such parties was not within the alienage jurisdiction of the federal courts. A panel in the present case followed Matimak, concluding that a British dependent territory is not itself a “foreign state” for purposes of 28 U.S.C. Section 1332(a)(2) (alienage jurisdiction).

[Editorial Note: The “British Overseas Territories” include Anguilla, Bermuda, British Indian Ocean Territory, the British Virgin Islands, the Cayman Islands, the Falkland Islands, Gibraltar, Montserrat, the Pitcairn, Saint Helena and dependencies, South Georgia and the South Sandwich Islands, and the Turks and Caicos Islands.]

The dissenters would have granted a rehearing en banc, and argue that the panel decision essentially makes the residents of Bermuda and other British overseas territories “stateless.” They also point out that commentators have widely criticized this decision. Having the whole Court re-examine that position is essential, they claim, especially because it conflicts with the other circuit courts which have addressed the issue. The U.S. State Department, they note, recognizes Bermuda as a “British Overseas Territory.” Moreover, British law does not describe Bermuda citizens and corporations as “nationals,” but as “subjects” of the UK.

“Our Circuit is alone in concluding that federal alienage jurisdiction does not extend to citizens and corporations of British Overseas Territories. The Third Circuit, largely out of deference to the Executive Branch’s position that Hong Kong corporations were considered, at the time, ‘subject to British sovereignty,’ found that they fell within the federal court’s alienage jurisdiction. ... The Seventh Circuit has held that a Cayman Islands corporation could be sued in federal court under alienage jurisdiction, explaining that, ’certainly, the exercise of American judicial authority over the citizens of a British Dependent Territory implicates this country’s relationship with the United Kingdom - precisely the raison d’etre for applying alienage jurisdiction. ... The Fourth Circuit, without a discussion of the issue, has found that a Bermuda resident - apparently the same individual defendant sued in this case - was a ‘citizen’ or ‘subject’ of a foreign state for alienage jurisdiction purposes.” [Slip Op. 7-9]

Citation: Koehler v. The Bank of Bermuda (New York) Ltd., No. 98-9624 (2d Cir. September 28, 2000) (reh. en banc den.).

STANDING TO SUE

In civil rights action by Mexican descendants challenging deplorable work conditions, First Circuit affirms dismissal of State of Mexico, which had joined as plaintiff under parens patriae doctrine, for lack of standing

In 1998, workers of Mexican descent sued a large Maine company, DeCoster Egg Farms, alleging that the deplorable working conditions at its plants violated plaintiffs’ civil rights (see 42 U.S.C. Section 1981). The plaintiffs purported to represent a class of “all former and current migrant farm workers of Mexican race and descent” employed by the defendants. The Mexican State also joined as parens patriae to protect its citizens and its own quasi-sovereign interests. The American doctrine of parens patriae [ literally “parent of the country”] developed with respect to States of the United States. It created an exception to the usual standing rules applied to private citizens, recognizing the special role that a State may play when it asks the courts to protect its quasi-sovereign interests in the well-being of its citizens.

The district court dismissed Mexico as a plaintiff for lack of standing and Mexico noted an appeal. The U.S. Court of Appeals for the First Circuit affirms. The Court concludes that it should not recognize parens patriae standing in a foreign nation unless the Supreme Court or the political branches have clearly showed an intent to grant such standing.

The Court preliminarily notes that it is unusual for a foreign nation to claim standing under the parens patriae doctrine, and that states more commonly appear (1) in actions to safeguard their specific national interests or (2) as amicus curiae. Neither the First Circuit nor the U.S. Supreme Court has spoken to the issue of whether a foreign nation may rely upon the parens patriae principle solely to uphold the interests of its descendants living abroad.

The Court rejects Mexico’s argument that it would perform much like a State of the U.S. in such a situation. “... [E]ven if States could bring suits such as this one, Mexico’s claim would still fail. By definition, a foreign nation has no cognizable interests in our system of federalism. And such interests are a critical element of parens patriae standing.”

“Nor is Mexico’s position supported by adherence to any principle of customary international law. Such a principle would provide an arguable basis on which to grant standing. Mexico, however, has admitted that it knows of no such principle recognizing parens patriae standing in foreign nations and we likewise have found none. Instead, Mexico points hopefully to the principle of comity. The principle is well recognized but beside the point. Comity permits foreign nations to sue in our courts if they meet the normal standing requirements imposed on individuals. ... But parens patriae standing goes beyond normal standing requirements.”

“Moreover, the granting of parens patriae status to foreign nations would raise concerns beyond the lack of support for such status in precedent or prior reasoning. One particularly compelling concern was thoughtfully articulated by the district court. The conduct of the foreign affairs of this country is committed to the Executive and to the Congress. This division of power should give courts pause before entering this arena, absent guidance from those other branches. Care should be taken not to impinge on the Executive’s treaty-making prerogatives or to assume that courts have the institutional competence to perform functions assigned elsewhere by the Constitution. ... The Executive often requires, before extending rights to foreign nations, that there be agreements providing for reciprocal protection of American interests. The ability of the other branches to secure such reciprocity could be undermined if the Judiciary did not adhere to the principal of non-interference.” [Slip Op. 17 - 19]

Citation: Estados Unidos Mexicanos v. Decoster, No. 99-2170 (1st Cir. October 11, 2000).

TAXATION

As result of its financial services to U.S. holding company, English merchant bank incurred legal fees; European Court of Justice finds “direct and immediate link” to bank’s overall business, making Value Added Tax on fees deductible in part under Sixth VAT Directive

The Midland Bank Plc and the London merchant bank Samuel Montagu & Co. Ltd. belonged to a group of companies considered as a unit for purposes of the Value Added Tax (VAT). Some of Montagu’s services are VAT taxable while some are exempt. When Quadrex Holdings, Inc., a Delaware corporation, took over Mercantile House Holding Ltd., Montagu acted for Quadrex. The latter agreed with British & Commonwealth Holding Plc. (BCH) that BCH would buy Mercantile and then sell Quadrex its wholesale brokerage division.

BCH soon had falling-outs with both Quadrex and Mercantile. In 1988, BCH (1) sued Quadrex in the English courts because it turned out to have insufficient funds to buy part of Mercantile and (2) sued Montagu because it had negligently misrepresented the American company’s finances. In suit (1), Quadrex sought indemnity from Montagu. The parties settled litigation (2) in 1994. In the course of preparing to try both lawsuits, solicitors Clifford Chance had represented Montagu. The solicitors had billed Montagu for their fees for 1988 to 1995, and it is the VAT charged on those fees which is at issue in the instant case.

Article 2 of the First VAT Directive (Directive 67/227) calculates the VAT on the price of services after deducting the amount of VAT borne directly by the various cost components. On some occasions, services partially pertain (1) to transactions as to which VAT is deductible and (2) partially to transactions as to which VAT is not deductible. In such circumstances, only the proportion of VAT attributable to (1) would be deductible.

The Midland, however, claimed a VAT deduction for all of the legal services. It argued (1) that the legal services supplied by the solicitors were entirely attributable to the supply of financial services by Montagu to Quadrex and (2) that this was a supply of services in respect of which VAT was deductible in accordance with Article 17(3)(c) of the Sixth Directive. This Article requires the Member States to afford a deduction or refund of VAT to the extent that goods and services are used for transactions exempted under Article 13 “when the customer is established outside the Community.”

 

The Commissioners of Customs and Excise held that the legal services had not been used solely on deductible services, leaving the Midland with only a partial VAT deduction. The Midland appealed to the VAT and Duties Tribunal which allowed the appeal. The Commissioners next appealed to the High Court of Justice of England and Wales (Queens Bench Division).

Pursuant to Article 177 of the E.C. Treaty (now Article 234), the High Court referred several questions to the European Court of Justice on the proper interpretation of Article 2 of the First Directive 67/227 on turnover taxes and of Article 17(2) of the Sixth Council Directive 77/388 on the uniform basis of assessing VAT.

The Second Chamber of the ECJ first determines that it must read Article 17(2) of the Sixth Directive in light of Article 17(5). The latter requires a direct and immediate link between input goods or services and output services, thus making the ultimate aim sought by the taxpayer irrelevant. Since Montagu has carried out VAT-exempt transactions under the Sixth Directive, he has a right to deduct VAT but only to the extent he had used input goods and services for the purposes of these exempt transactions.

The Court found further support for this reading in Article 2 of the First Directive. It provided that a taxpayer could only deduct the VAT borne directly by the several cost components of a taxable transaction. A trader keeps his entitlement to deduct, however, even if the contemplated economic activity did not give rise to taxed or taxable transactions due to exceptional circumstances beyond a trader’s control. Because of the wide diversity of commercial and professional transactions, this Court cannot speak with precision as to the nature of a direct and immediate link. Instead, the national courts have to apply the ECJ’s legal test to the facts before them.

Where a taxable person took part in both VAT-deductible transactions and in non-deductible transactions, the taxpayer could deduct VAT on the goods and services obtained by him if there was a direct and immediate link with VAT-deductible output transactions. This right of deduction assumes that the money spent in obtaining goods and services formed a part of the cost components of the taxable transaction. These components normally must have arisen before completion of the taxable transaction. A direct and immediate link, therefore, does not exist between an output transaction and those services the taxable person used after that transaction was over.

In the case at bar, the Court points out that the expenses for legal services resulted from the financial services transaction, so that they did not form a part of the cost components of the output transaction. On the other hand, the expenditure did form part of the taxable person’s general costs and thus was a factor in pricing its products. In the Court’s view, this did create a direct and immediate link to its overall business, making VAT deductible in part under Article 17(5) of the Sixth Directive. On remand, the Court observes, it may be that the taxable person (by way of exception) might conceivably prove that the costs pertaining to the goods or services he had used as a result of making a deductible transaction were in fact part of the cost components of that transaction. 

Citation: Commissioners of Customs and Excise v. Midland Bank Plc. (Case C‑98/98)[2000] 3 C.M.L.R. 301, [2000] All E.R. (EC) 673.

TRADE

U.S. executive and legislative branches approve “Permanent Normal Trade Relations” with China that may pave way to latter’s World Trade Organization membership in near future

On May 24, 2000, the U.S. House of Representatives approved “Permanent Normal Trade Relations” (PNTR) with China by a vote of 237 to 197. On September 19, 2000, the Senate passed the bill with a 83-15 vote. The President signed the bill into law on October 10, 2000. This brings China a step closer to WTO membership, possibly before the end of the year.

The Act has two main sections, (1) normal trade relations with China, and (2) U.S.-China relations. It provides, in particular, for (1) terminating the application of Title IV of the Trade Act of 1974 to China, allowing the President to grant normal trade relations treatment to China (Section 101), and (2) approving China’s accession to the World Trade Organization (WTO).

The latter provision requires the President to submit a report to Congress certifying that the terms and conditions are at least equivalent to those agreed to between the U.S. and China on November 15, 1999. See 1999 International Law Update 169. The nondiscriminatory treatment will be effective upon China’s entry into the WTO (Section 102).

With this action, Congress has ended its practice of granting normal trade privileges to China on an annual basis and instead grants Chinese products the same low-tariff access that products from most countries enjoy. China, in return, has granted U.S. products lower tariffs and has made other free-trade concessions as part of the U.S.-China agreement on China’s WTO accession.

Representative Curt Weldon (R-Pennsylvania) had introduced a Concurrent Resolution that the U.S. should revoke PNTR if China were to attack, invade, or impose a blockade on Taiwan (HCR 334).

[Editorial Note: On May 19, 2000, the EU has reached an agreement with China for China’s WTO accession. The agreement includes significant reductions on China’s import tariffs for EU products.]

Citation: Public Law 106-286, 114 Stat. 880 (October 10, 2000) [H. Res. 4444] An Act to authorize extension of nondiscriminatory treatment (normal trade relations treatment) to People’s Republic of China, and to establish a framework for relations between United States and People’s Republic of China; The White House press release (October 10, 2000); 146 Cong. Record H 3746 (May 24, 2000); U.S. Trade Representative press releases 00-38 (May 17, 2000) & 00-63 (September 19, 2000); The Washington Post, September 20, 2000, page A1 & May 29, 2000, page A2; WTO Director-General Mike Moore’s Statement ... (24 May 2000), available on WTO website “www.wto.org”. [Further information on this matter is available on website of “China Trade Relations Working Group” of White House, at “www.chinapntr.gov”; The European Union News, News Release No. 23/00 (May 19, 2000), EU-China Agreement on WTO].

WORLD TRADE ORGANIZATION

WTO Appellate Body affirms earlier Panel Report on Canadian term of patent protection, upholding U.S. position that WTO extended patent protection benefit should apply retroactively

On May 5, 2000, a Dispute Settlement Panel of the World Trade Organization (WTO) issued a report in the U.S.-Canada dispute over Canada’s term of patent protection. In essence, the Panel held that Canada’s 17-year patent protection fails to comply with Articles 33 and 70 of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). See 2000 International Law Update 81. Canada appealed on several issues of law.

At issue is Section 45 of Canada’s Patent Act. Before October 1, 1989, Canada granted patent protection for only 17 years. With Section 44 of the Act, effective October 1, 1989, Canada extended the protection to 20 years from the date of filing. There was, however, no provision for applying the extended protection to previously filed patents. The U.S. argued that the benefits of TRIPS should apply to all patents that were protected in Canada as of January 1, 1996, the date TRIPS became effective for Canada. On September 18, 2000, the WTO Appellate Body issued its Report in the matter, essentially upholding the previous Panel Report.

Among other things, Canada challenged the Panel’s finding that the “non-retroactive application rule” contained in Article 70.1 of TRIPS with respect to “acts” that occurred prior to the date of application of TRIPS for a Member, does not override the rule in Article 70.2, with respect to existing “subject matter” which had protection on the date TRIPS entered into force for the Member in question. The Appellate Body upholds the main interpretations of the previous Panel:

(1) Article 70.2, and not Article 70.1, of TRIPS applies to inventions protected by previously registered patents because such inventions are “subject matter existing ... and which is protected” on the date of application of TRIPS for Canada. Therefore, Canada must apply the obligations of Article 33 of TRIPS to patents previously registered.

(2) Article 45 of Canada’s Patent Act is inconsistent with Article 33 of TRIPS because it does not provide for a twenty-year term of patent protection.

Citation: Canada - Term of Patent Protection (WT/DS170/AB/R) (18 September 2000). Appellate Report is available on internet website of WTO at “www.wto.org”; U.S. Trade Representative press release 00-62 (September 18, 2000).

Fourth Circuit finds that Spain did not abandon two vessels that sank in 1750 and 1802 off shores of present-day Virginia. In the context of an in rem admiralty action, the U.S. Court of Appeals for the Fourth Circuit has held that Spain did not abandon its Royal Naval vessels “La Galga” and “Juno” that sank in 1750 and 1802, respectively, off the coast of present-day Virginia. Under the 1902 Treaty of Friendship and General Relations between the U.S. and Spain, owners may abandon vessels only by express acts. In an action brought by Sea Hunt, Inc., the district court found that Spain had retained title to the Juno but had expressly abandoned the La Galga in the 1763 Definitive Treaty of Peace. On appeal, the U.S. Court of Appeals for the Fourth Circuit finds that mere passage of time before any action is taken does not necessarily constitute abandonment. In fact, Spain attempted salvage after the La Galga sank and maintained the ship on its naval registry. Furthermore, Spain has expressly stated its wish to maintain the wreck as a military grave site. The Court, therefore, denies the salvage award to Sea Hunt, the private company which had located the vessels. Citation: Sea Hunt, Inc. v. The Unidentified Shipwrecked Vessel or Vessels ...., 221 F.3d 634 (4th Cir. 2000).

U.S. joins Council of Europe’s GRECO agreement. The U.S. has joined the “Group of States against Corruption” (GRECO) agreement of the Council of Europe. The goal of GRECO is to reduce corruption through a compliance program and through peer pressure from the participating countries. GRECO monitors compliance with the “Guiding Principles for the Fight Against Corruption,” and the implementation of international agreements pursuant to the Programme of Action against Corruption (PAC). So far, the Council has adopted three agreements, the Convention on Corruption (ETS No. 173) (opened for signature January 27, 1999), the Civil Law Convention on Corruption (ETS No. 174) (opened for signature November 4, 1999), and the Recommendation R(2000) 10 on codes of conduct for public officials (adopted May 11, 2000). The U.S. declared that it will apply the “Guiding Principles for the Fight Against Corruption” adopted by the Committee of Ministers of the Council of Europe on November 6, 1997 (Resolution (97)24). Twenty-five states have now joined the GRECO agreement. Citation: Council of Europe Press release, dated October 6, 2000, available on Council’s internet website “www.coe.int”. [Further information on GRECO is available on internet website “www.greco.coe.int”.]

U.S. President designates countries under African and Caribbean trade acts, USTR designates countries for Caribbean Basin Trade Partnership Act eligible for preferential trade. On October 2, 2000, U.S. President Clinton signed a proclamation designating 34 sub-Saharan African countries as beneficiary countries under the African Growth and Opportunity Act (AGOA) [see 2000 International Law Update 95] and providing for preferential treatment for textile and apparel imports from those countries. At the same time, President Clinton declared the 24 current beneficiaries of the Caribbean Bases Initiative as beneficiary countries under the Caribbean Basin Trade Partnership Act (CBTPA) and provided for preferential imports of certain textile products. Both the AGOA and the CBTPA provide the beneficiary countries access to the U.S. market at reduced customs rates. The African country designations are based on the AGOA’s eligibility criteria, including whether a country is making progress towards a market-based economy, the rule of law, and reduction of barriers to U.S. trade and investment. — The U.S. Trade Representative has determined that 10 beneficiary countries of the CBTPA have implemented, or made substantial progress towards implementing, customs procedures required by the Act. The designated countries — Belize, Costa Rica, Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, and Panama — are now eligible for the Act’s preferential trade provisions. The effective date was October 2, 2000. — The U.S. Department of the Treasury has issued interim regulations amending the Customs Regulations (19 C.F.R. Parts 10 and 163) to implement these trade benefits. Citation: U.S. Trade Representative press release 00-67 (October 2, 2000) (Presidential designation of countries under AGOA and CBTPA) & 00-68 (October 5, 2000) (CBTPA designation by USTR); The White House press release of October 2, 2000 (AGOA beneficiary designation by President); 65 Federal Register 59650 (October 5, 2000) (interim regulations for Caribbean Basin Trade Partnership Act); 65 Federal Register 59668 (interim regulations for African Growth and Opportunity Act).

U.S. and EU agree on joint review of statute on “Foreign Sales Corporations.” On September 30, 2000, the U.S. and the European Union (EU) reached an agreement regarding procedures for reviewing whether the “Foreign Sales Corporation” (FSC) repeal and replacement legislation, which is currently pending in Congress, complies with WTO trading rules. FSCs are tax constructs that reduce U.S. income taxes for U.S. companies with foreign trade income. On February 24, 2000, the WTO Appellate Body had upheld an earlier WTO Panel finding that FSCs constitute improper export subsidies. See 2000 International Law Update 47. The agreement provides procedural rules for the review of the replacement legislation, including a panel review of its WTO-consistency, and for possible arbitration. The procedures agreed upon resemble those used in the Canada-Australia salmon dispute. Citation: U.S. Trade Representative press release 00-65 (September 30, 2000).

EU approves merger of AOL and Time Warner. On October 11, 2000, the EU Commission approved the proposed merger between America Online, Inc. (AOL) and Time Warner, Inc. The EU antitrust authorities have been investigating the merger since June 14, 2000. In the meantime, AOL and Warner offered a “package of commitments.” Time Warner canceled a proposed merger with the British music company EMI Group Plc, and AOL agreed to sever its relationship with the German music and publishing company, Bertelsmann AG, and the French media company Vivendi SA. Citation: Commission of European Communities RAPID press releases (October 5 & 11, 2000); Washington Post, October 12, 2000, page E1.

FCC issues new regulations on role of foreign companies in U.S. telecommunications market. The U.S. Federal Communications Commission (FCC) has issued rules and policies on foreign participation in the U.S. telecommunications market. The rules clarify the Foreign Participation Order of 1997 (62 Federal Register 64741), and revise the FCC’s rules regarding prior notifications of foreign affiliations. They also amend the rules regarding “interlocking directorates” and on cross-references to prior notification requirements [see 47 C.F.R. Part 63]. The FCC has issued the rules and the subsequent clarifications to comply with WTO obligations and the WTO Telecom Agreement. Among other things, the FCC will continue to require prior notification of a U.S. carrier’s controlling investment in a foreign carrier, or a foreign carrier’s controlling or greater than 25% investment in a U.S. carrier. The rules go into effect on November 9, 2000. Citation: 65 Federal Register 60113 (October 10, 2000).

U.S. and EU are lifting Yugoslavia sanctions. In the wake of the departure of Mr. Milosevic as President and the arrival of President Vojislav Kostunica and his new administration, Western countries are beginning to lift the sanctions imposed on Yugoslavia and Serbia. On October 12, 2000, U.S. President Bill Clinton directed the Department of Treasury and the Department of State to take action to lift the sanctions imposed against Serbia in 1998, including the oil embargo and flight ban, but not those sanctions targeted at members of the former governing regime. — On October 9, 2000, the EU issued a Council Common Position to immediately lift portions of the sanctions imposed on Yugoslavia, including the freeze of assets held abroad by the Yugoslav and Serb Governments, and the ban on new investment in Serbia. The EU has also lifted the flight ban imposed on Yugoslavia and the prohibition on supplying it with petroleum products. — In a related matter, the Japanese Ministry of Foreign Affairs has announced that Japan may also consider lifting the sanctions it imposed on Yugoslavia in 1998. The Japanese sanctions consisted of freezing the assets of the Yugoslav and Serb governments in Japan, and restricting visa issuance to government-related persons. Citation: The White House press release (October 12, 2000); 2000 O.J. of European Communities (L 255) 1, 2, 3 (October 9, 2000); The Japanese Ministry of Foreign Affairs, press conference of October 13, 2000.

EU to continue sanctions on Burma/Myanmar. With Council Common Position 2000/601/CFSP, the EU Council of Ministers has decided to continue the sanctions it imposed on Burma (Myanmar) for its continuing violations of human rights until April 29, 2001. Citation: 2000 O.J. of European Communities (L 257) 1, October 11, 2000.

Federal district court dismisses claims against Japan brought by former forced laborers. On September 21, 2000, the U.S. District Court for the Northern District of California in San Francisco dismissed an action brought by plaintiffs who had been prisoners of war and forced to work for Japanese corporations during the Second World War, including Mitsubishi and Nippon Steel. The Court noted that the plaintiffs implicated federal common law of foreign relations by cloaking their complaints in terms of state law. The U.S.-Japan Treaty of Peace of 1951 [3 U.S.T. 3169, T.I.A.S. No. 2,490]. bars plaintiffs’ claims. Furthermore, the Allied experience in post-war Japan and the drafting history of the treaty, as well as the position of the U.S. Department of State, support the principle of finality embodied in the Treaty  — The Japanese Ministry of Foreign Affairs issued a statement expressing its satisfaction with the dismissal of the case and emphasizing that such claims have been settled based on the treaty. Citation: In Re: World War II Era Japanese Forced Labor Litigation, No. MDL-1347, 2000 WL 1404893 (N.D. Cal. Sept. 21, 2000); Japanese Ministry of Foreign Affairs -- comment by Press Secretary (September 26, 2000).

U.S. and India agree on Textile Tariff Bindings. The U.S. and India have made commitments on textile and apparel bindings. The parties reached this agreement during a visit to Washington of Indian Prime Minister Vajpayee; it establishes reciprocal tariff ceilings on a range of textile and apparel items. In so doing, the arrangement promotes the export of U.S. textiles to India. Citation: U.S. Trade Representative press release 00-61 (September 15, 2000).

Sixth Circuit affirms de-naturalization of former Nazi collaborator in persecution of Jews. On September 5, 2000, the Sixth Circuit affirmed the de-naturalization of 79-year-old Algimantas Dailide. Dailide had allegedly taken part in the persecution and arrests of Jews living in Nazi-occupied Vilnius, Lithuania, during the Second World War. He was a member of the Nazi-sponsored Lithuania Security Police (Saugumas) from 1941 to 1944, and came to the U.S. in 1949 as a refugee. The Sixth Circuit found “clear, unequivocal, and convincing” evidence that Dailide had assisted the Nazi invaders in persecuting local civilians, and had willfully misrepresented material facts on these matters to obtain a U.S. visa. — The Department of Justice noted in its press release that projects of its Office of Special Investigations (OSI) have so far led to the revocation of U.S. citizenship of 64 Nazi persecutors, and 53 have been removed from the U.S. since OSI began its operations in 1979. Currently, approximately 250 individuals are under investigation, and 17 are the subject of ongoing litigation. Citation: United States v. Dailide, No. 97-3340, 2000 WL 1264639 (6th Cir. Sept. 5, 2000); U.S. Department of Justice press release of September 5, 2000.

European Court of Justice annuls EU Directive banning tobacco advertising. On October 5, 2000, the European Court of Justice (ECJ) issued a judgment in Cases C-376/98 and C-74/99, annulling the 1998 EU Directive 98/43/EC banning tobacco advertising and sponsorship of tobacco products. The ECJ held that the Community legislature had no power to adopt that Directive based on Treaty provisions relating to the establishment of the internal market, freedom of establishment, and freedom to provide services. Thus, the Court based its decision on constitutional grounds rather than on public health grounds. — The World Health Organization (WHO) has issued a statement criticizing the annulment of the Directive, and requesting EU Member States to strengthen their internal tobacco control legislation. The WHO also notes that its 191 Member States have recently begun negotiating global rules on tobacco control. In addition, the WHO notes that a tobacco advertising ban will be included in the Framework Convention on Tobacco Control (FCTC), expected to be adopted in 2003. Citation: European Court of Justice (ECJ), Judgments of Court in Cases C-376/98 and C-74/99; ECJ press release 72/00 of October 5, 2000, available on ECJ website “www.europa.eu.int”; United Nations News Service (October 5, 2000), available on website “www.un.org”.

U.S. and Austria agree on fund to compensate individuals forced into hard labor during World War II. Austria and the U.S. have reached an agreement to establish a $380 million fund to compensate individuals whom the Nazi regime forced into hard labor during the Second World War. Both the Austrian government and companies who benefitted from forced labor will provide the financing. Payments to an estimated 150,000 victims is expected to begin by the end of the year. — The German parliament had approved a similar fund for the compensation of forced laborers during the Second World War, providing $4.5 billion in compensation. Citation: Chicago Tribune of October 7, 2000, page 4; AP report of October 6, 2000.

Britain enacts written Bill of Rights. On October 2, 2000, the Parliament of the United Kingdom (UK) passed laws to establish a written Bill of Rights. It includes such protections as the right to freedom from torture and unreasonable searches, the right to liberty, education, fair trial, and freedom of expression. The new “Human Rights Act” has 12 main parts (“Articles”) plus additional rules set out in a “Protocol.” It incorporates into domestic law the European Convention for the Protection of Human Rights and Fundamental Freedoms which the UK ratified as a purely international obligation in 1951. Britain did not previously have a written summary of citizen’s rights but instead had rights established in a variety of charters and laws, dating back to the Magna Charta of 1215 and the Bill of Rights of 1689. Citation: Lloyd’s List International (October 4, 2000); The Guardian (London), page 58 (October 3, 2000).