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 11 (November).

FORUM NON CONVENIENS

In case of alleged securities fraud by Canadian company, Second Circuit reverses dismissal on forum non conveniens grounds because majority of allegedly defrauded investors were U.S. based and had bought stock within U.S.

In the following direct action and not-yet-certified class action, the plaintiffs allege that officers of a Canadian corporation perpetrated federal securities fraud and other offenses. (Plaintiffs in both actions are jointly referred to here as “plaintiffs”). Philip Services Corporation is a metal processing company based in Ontario, Canada which is now in bankruptcy proceedings. Between 1992 and 1997, the company bought 15 American metal processing facilities in the U.S. and raised capital through its stock offerings in the U.S. and Canada. The company aggressively marketed its stock in the U.S. through “road shows,” press releases and filing financial reports with the Securities and Exchange Commission (SEC). Through stock offerings in 1997, the company raised $380 million of which $284 million came from U.S. investors.

As it turned out, the company had to drastically downgrade its initially reported earnings for years 1995-1997, and these lower earnings soon became multi-million dollar losses. This caused the company’s share price to plummet from $13-1/8 in January 1998 to below $2 eight months later. The plaintiffs alleged that the company officers had intentionally rigged the finances to overstate the company’s value. For example, they failed to report several transactions, overstated inventories, and improperly deferred losses. Of the fourteen director-officers being sued, ten are Ontario residents.

A New York federal court dismissed both cases on grounds of forum non conveniens. The plaintiffs appealed, claiming that the district court failed to defer to the plaintiffs’ choice of forum, mischaracterized the transactions as international, and did not give enough weight to the U.S. interest in enforcing its securities laws. The U.S. Court of Appeals for the Second Circuit reverses and remands to the district court for further proceedings.

The U. S. Supreme Court began shaping the modern doctrine of forum non conveniens in Gulf Oil Corp. v. Gilbert, 330 U.S. 485 (1947) (an interdistrict transfer case). The Second Circuit continues to apply the Gilbert test, as elaborated for international purposes in Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981), and its own precedents.

The threshold question in the forum non conveniens analysis is whether plaintiffs have one or more adequate alternative fora. A movant can meet this test if the defendant is amenable to process there (or voluntarily submits to it), if the forum permits litigation of the subject matter, if it provides enough procedural safeguards, and if its domestic law offers an adequate remedy.

The U.S. Supreme Court established the “fraud on the market” theory in Basic Inc. v Levinson, 485 U.S. 224, 247 (1988), creating a presumption in actions under Section 10(b) or Rule 10b-5 that a stock price accurately reflects all information available in the marketplace. Therefore, a plaintiff in such an action does not have to prove specific reliance on false information.

Plaintiffs claim that Canadian securities law does not recognize a “fraud on the market” theory and that this renders Ontario an inadequate forum. According to the plaintiffs, some of them could not claim reliance on the defendants’ statements under any other fraud theory and could therefore not recover damages in Ontario. Under these circumstances, an Ontario court would deny class certification.

The Court refuses to consider the first argument (1) because plaintiffs raised it for the first time on appeal, and (2) because it brings up complex questions of foreign law.

“Concededly, some plaintiffs who would have a remedy in American courts under the fraud on the market theory will be unable to prevail in Canada. But it is far from obvious, especially on this record, who those plaintiffs are or how to distinguish them from others who might succeed in Ontario. ... If the issue had been raised below, the district court would have been in a better position to address it than we are, particularly with respect to the definition of the proposed class and subclasses.”

“Plaintiffs did raise the second, procedural issue of whether Ontario law would permit class certification in the district court. The court correctly found that procedural differences do not make Ontario an inadequate forum. ...” [Slip Op. 21-23] The Court therefore concludes that Ontario is an adequate forum for the plaintiffs.

The Court then applies the Gilbert criteria to the choice between Ontario and New York. Gilbert establishes a presumption in favor of the plaintiff’s chosen forum when weighing the public and private interest factors that favor each location. Here, the district court failed to give proper weight to the plaintiffs’ choice of forum. The court mistakenly assumed that, where plaintiffs proceed in a representative capacity, their choice of forum gets “less weight” than would be the case for an individual plaintiff.

Furthermore, in the Court’s view, the “public interest” factors weigh in favor of New York. For example, the U.S. has a local interest in this lawsuit because U.S. investors have allegedly suffered harm from purchases they made in the U.S. The presence of a few Canadian investors does not change the result. Moreover, Ontario would probably apply American law as to at least some of the claims, and an American court would likely apply Canadian law to claims by non-resident class members because they bought securities outside the U.S. Thus, the interest in avoiding the application of foreign law favors neither forum.

The “private interest” factors also favor New York. The parties can ship the necessary documents from Canada without too much difficulty, and Ontario witnesses can fly to New York City in about three hours. The Court notes, however, that there may be some problems with compelling unwilling Canadian witnesses to testify in New York. In sum, the Court finds that the plaintiffs’ choice of forum deserves deference under Gilbert, and the public and private interest factors have not overcome this strong presumption.

Citation: DiRienzo v. Philip Services Corp., Nos. 99-7825 & 99-7776 (2d Cir. November 8, 2000).

FORUM NON CONVENIENS

House of Lords upholds English class action brought by former workers in defendant’s South African asbestos mines and plants, limiting Spiliada doctrine to weighing of private interests and rejecting U.S. inclusion of public interests in deciding forum non conveniens motions

Cape Plc. began to mine asbestos in South Africa in 1893. It changed its structure in 1948 so that wholly owned subsidiaries and one Italian factory ran its South African business. This setup lasted until 1979 when Cape sold its South African mining interests.

In 1997, solicitors Leigh Day & Co. issued two writs against Cape on behalf of Rachel Lubbe, Pauline Nel and four others. Soon after, the same firm issued a writ on behalf of four more claimants. The gist of these (and later) claims was that defendant’s negligence had put its employees in harm’s way from unprotected labor in defendant’s asbestos mines and plants. Defendant meanwhile obtained a stay of the Lubbe action from the High Court on the grounds of forum non conveniens.

Leigh Day next issued a writ against Cape on behalf of 1,539 others in January 1999. Three months later, different solicitors issued writs for additional claimants against Cape. Ultimately, over 3,000 claimants ended up on the plaintiffs’ side.

By April of 1999, the High Court ordered that suits brought by most of the claimants should go forward as a “group” action. Defendant protested that Leigh Day had all along planned to set up a group action and had gotten legal aid on that basis.

Cape saw this as an abuse of process, in effect, a tactical gambit to secure English jurisdiction bit by bit. Citing Spiliada Maritime Corporation v. Cansulex Ltd., (H.L.) [1987] 1 Lloyd's Rep. 1; [1987] 1 A.C. 460, it urged that the English Courts would find it impracticable to manage a suit on behalf of thousands of South African citizens over whom they had no jurisdiction because the evidence was located and defendant had committed the alleged wrongs in South Africa.

Plaintiffs replied that Cape was well aware that many claimants would be coming forth after the initial ruling in the Lubbe matter. In their view, the Court of Appeal correctly held that South Africa was not an available forum under Spiliada principles as to forum non conveniens. Plaintiffs, moreover, realistically could not get their day in court in that forum because they could not afford attorneys and because legal aid was not available to fill the need.

Assuming arguendo that plaintiffs could show that defendant had breached a duty of care to plaintiffs based on policy or financial decisions made in England, the Court of Appeals had concluded that almost every other relevant event took place in South Africa. Any dangerous work conditions or emissions from the mines located there and any injury loss or damage occurred outside of England. Almost all witnesses, documents and physical evidence needed to resolve the litigation were also located in South Africa.

The House of Lords allows the appeal and terminates the stay. Two Law Lords write concurring opinions and three other Lords agree with them. The Lords first point out that a plaintiff generally has to take a foreign forum as it finds it although in many respects the English courts may be more favorable to plaintiff. If the foreign court is the appropriate forum, it is not necessarily enough to show that legal aid is not available there to the degree that it is in England.

In addition, the “group” management of a case of this type is the only cost-effective and prompt way. Plaintiffs raise serious legal and factual issues as to the duties of a parent corporation regarding the conduct of its foreign subsidiaries, the choice of English versus South African law as applicable, and the working conditions in the asbestos mines and factories over a period of many decades.

The lower court also erred in brushing aside arguments as to a likely denial of justice abroad based on its speculation that an early and just pretrial settlement would likely come about. By all odds, this litigation will be potentially drawn out and costly. The record clearly suggests that South African legal aid is going through a financial crunch and would be unavailable to the plaintiffs. Moreover, no firm of South African lawyers with the required expertise in the field seemingly has the means or would shoulder the hazards of such a complex matter on a contingency fee basis.

Should the English courts stay their hands, the Lords conclude that plaintiffs’ inability to secure the needed legal representation and expert witnesses in South Africa would in all likelihood cause a denial of justice. Therefore, there is a strong basis for rejecting a stay under the compelling circumstances of this case. Problems of third party joinder and possible hurdles to the enforcement of an English judgment might, of course, cut in the direction of trial abroad. But our courts can minimize these risks, for example, by admitting new parties only if they commit themselves to be bound by the results of the instant litigation.

Plaintiffs also relied on Article 6 of the European Convention for the Protection of Human Rights and Fundamental Freedoms [November 4, 1950, 213 U.N.T.S. 221] which essentially guarantees both sides to a civil dispute a fair and equal chance to be heard. “Since, as Spiliada makes clear, a stay will not be granted where it is established by cogent evidence that the plaintiff will not obtain justice in the foreign forum, I cannot conceive that the Court would grant a stay in any case where adequate funding and legal representation of the plaintiff were judged to be necessary to the doing of justice and these were clearly shown to be unavailable in the foreign forum although available here. I do not think art. 6 supports any conclusion which is not already reached on application of Spiliada principles.” [394]

Plaintiffs had also contended that Article 2 of the Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters [”Brussels Convention,” September 27, 1968, 1972 O.J. (L 299) 32, reprinted in 8 I.L.M. 229 (1969), amended by 1990 O.J. (C 189) 1, reprinted as amended in 29 I.L.M. 1413 (1990)] precluded the granting of a stay. Defendant countered that South Africa is not a Contracting Party to this European agreement. “It is ... unnecessary to decide whether the effect of art. 2 is to deprive the English Court of jurisdiction to grant a stay in a case such as this. Had it been necessary to resolve that question, I would have thought it necessary to seek a ruling on the applicability of art. 2 from the European Court of Justice, since I do not consider the answer to that question to be clear.” [Id.]

One of the lower courts noted that the asbestos mines and mills that defendant’s subsidiaries had been running are all shut down and the subs themselves are not present to be sued in that nation. As a result, “the only ground on which its Courts could exercise jurisdiction against it is that of prorogation. The validity of the defendant's undertakings is therefore critical to its argument that the South African Courts are available to the claimants as a forum in which their actions should be tried.” [395-96] The Lords, however, found defendant’s undertaking to submit to the jurisdiction of the South African courts to have been adequate.

“Furthermore the Court resolves the issue by looking to the interests of all parties and the ends of justice. (Cit.) ...[I]t does not do so from the point of view of the defender only. The only purpose of the undertaking is to satisfy the requirement that the other forum is available. The ground on which the jurisdiction of the Courts in the other forum is available to be exercised is of no importance either one way or the other in the application to the case of the Spiliada principles.” [397]

In a notable respect, one of the concurring opinions expressly parts company with the U.S. Supreme Court as to the role of the “public interest” in the doctrine of forum non conveniens. “I would therefore decline to follow those Judges in the United States who would decide issues as to where a case ought to be tried on broad grounds of public policy: see Union Carbide Corporation Gas Plant Disaster at Bhopal, 634 F. Supp. 842 [(S.D.N.Y. 1986)]; and Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981).”

“... the [English courts are] not equipped to conduct the kind of inquiry and assessment of the international as well as the domestic implications that would be needed if it were to follow that approach. However tempting it may be to give effect to concerns about the expense and inconvenience to the administration of justice of litigating actions such as these in this country on the one hand or in South Africa on the other, the argument must be resolved upon an examination of their effect upon the interests of the parties who are before the Court and securing the ends of justice in their case.” [398]

Citation: Lubbe et al. v. Cape Plc., [2000] 2 Lloyd’s Rep. 383; [2000] 4 All E.R. 268 (House of Lords, June 20).

HUMAN RIGHTS

European Court of Human Rights holds that enforcement against journalists of French statute barring news stories about joint criminal and civil proceedings violated Article 10 of European Human Rights Convention on freedom of expression

Albert DuRoy and Guillaume Malaurie (applicants), born in 1938 and 1952 respectively, are citizens of France residing in Paris. DuRoy was the editor of “L’Evenement du Jeudi,” a weekly magazine, and Malaurie was a staff journalist.

One of its February 1993 editions contained an article by Malaurie with the following headline: “Sonacotra: When the left puts its house in order.” The article especially criticized the relations between Michel Gagneux, the former leader of Sonacotra (National Company for the Construction of Workers’ Accommodation) and the new Sonacotra management. Apparently the company had filed a criminal complaint in February 1993, requesting that the court make it a civil party to certain proceedings pending against Mr. Gagneux over alleged misappropriation of company assets.

In March 1993, Mr. Gagneux filed a complaint against the applicants. It demanded that they appear before the Criminal Court of Paris to respond to the following charge: publishing information about the joinder of civil parties in breach of Section 2 of the French law of July 2, 1931. The applicants contended that the statute violated Article 10 of the European Convention for the Protection of Human Rights and Fundamental Freedoms, B. Carter & P. Trimble, International Law, Sel. Docs. 476 (1999-2000 Ed.).

In relevant part, Article 10 provides that “1. Everyone has the right to freedom of expression ... 2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, ... for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.”

The Paris Criminal Court convicted the applicants and fined them FF 3,000 four months later. The Court ordered applicants to pay damages with respect to Mr. Gagneux’s civil claim and to publicize the judgment. According to the Court, Section 2 constituted a general and absolute ban on publishing material about a complaint with joinder of a civil party. In the Court’s view, the ban was intended to guarantee the presumption of innocence and to protect the course of justice from extraneous influences.

Applicants appealed their convictions to the Paris Court of Appeal, reiterating their Convention Article 10 arguments. In February 1994, the Court upheld the convictions and the size of the criminal fine. On the other hand, it cut down the damages due to Mr. Gagneux to one franc.

In September 1996, applicants filed with the European Commission of Human Rights. The Commission decided that the application was admissible in June 1999. A Chamber of the new full-time European Court of Human Rights heard the case, consisting of Judges from Austria, Belgium, Cyprus, the Czech Republic, France, Lithuania and the United Kingdom. In a six-to-one vote, the Chamber concludes that France had violated Article 10 of the Convention.

The Court first points out that journalists covering pending criminal cases do have a duty (1) not to overreach the boundaries set in the interests of the due administration of justice, and (2) to respect the accused’s right to the presumption of innocence. The French statute here, however, blocked freedom of the press with an absolute and general ban on publishing any form of information.

Although the French courts thought that the statute qualified under the above terms of Article 10, the Human Rights Court disagrees. For example, the prohibition took aim only at criminal proceedings based on a complaint coupled with an application by the complainant to become a civil party to the proceedings. It left untouched those prosecutions filed by the public prosecutor’s office or by ordinary complaint. There seems, in the Court’s view, to be no objective basis for this distinction. Within its limited purview, the statute entirely blocks the press’s right to keep the public informed on matters that might well be in the public interest.

In the applicants’ case, the criminal case dealt with French politicians and their allegedly fraudulent behavior in the management of a public company operating residential centers for emigrants. This generated a genuine public interest. In addition, the Court noted, there were less draconian measures at hand for protecting the rights of the accused, e.g., Article 9‑1 of the French Civil Code and Articles 11 and 91 of the Code of Criminal Procedure. Therefore, the absolute ban of the 1931 law was not reasonably proportionate to the proper aims pursued in light of a democratic society’s interest in maintaining the freedom of the press. It clearly runs afoul of Convention Article 10.

Pursuant to Article 41, the Court awarded applicants FF. 50,000 to cover costs and expenses of litigation. [Editorial Note: Under Article 43 of the Convention, any party to a Chamber judgment, has three months in which to request a hearing by a Grand Chamber composed of seventeen judges.]

Citation: Du Roy v. France, Req. No. 34,000/96 [Eur. Ct. of Hum. Rts., 3rd Section, October 3, 2000. [Full text available in French at: http://www.coe.int].

JUDICIAL ASSISTANCE

Ninth Circuit rules that foreign criminal proceedings need not be “imminent” before federal courts may grant foreign government’s requests for evidentiary assistance under 28 U.S.C. Section 1782

In the following case, a person who wishes to remain anonymous (“appellant”) challenged U.S. judicial assistance to the Russian Federation which is investigating appellant’s alleged tax fraud. After the Russian Federation asked for judicial assistance, the U.S. initiated proceedings under 28 U.S.C. Section 1782 with the U.S. Attorney acting as commissioner. Appellant moved to dismiss them.

The district court denied appellant’s motion. Appellant argued on appeal that Section 1782 does not permit the obtaining of evidence for use in foreign criminal investigations until an actual foreign proceeding is imminent. Rejecting this argument, the U.S. Court of Appeals for the Ninth Circuit affirms.

Neither the plain language of the statute nor precedent in the Ninth Circuit impose a requirement that foreign proceedings be “imminent.” Section 1782 provides that “[t]he district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation. ...” In 1996, Congress amended Section 1782 to add the phrase “including criminal investigations conducted before formal accusation.”

If Congress had wanted to condition judicial aid on the imminence of foreign criminal proceedings, it could have said so. Moreover, imposing such a requirement could often create a “Catch-22" absurdity, i.e., it may turn out to be impossible for some foreign proceedings to become “imminent” without the evidence being sought in the U.S. Furthermore, Ninth Circuit precedent only requires that the foreign investigation relate to a judicial or quasi-judicial controversy. It has upheld assistance in cases where there were ongoing criminal investigations but no charges or proceedings were imminent.

Finally, the Court notes that the district court must screen such a request to ensure that it is not used for improper purposes such as harassing political opponents. The district court may in its discretion grant or deny such foreign requests for assistance based on an evaluation of whether the foreign request is justified.

Citation: United States v. Sealed 1, No. 00-35347 (9th Cir. November 1, 2000).

JURISDICTION(SUBJECT MATTER)

In dispute over marketing of medical supplies in Argentina, Eleventh Circuit analyzes whether Section 1332(a)(2) of Title 28 provides for subject matter jurisdiction where one party is foreign and the other parties are from different U.S. states

Iraola & Cia, S.A., an Argentine company, contracted with Kimberly-Clark Corporation, a citizen of Delaware and Texas, to distribute the latter’s medical products in Argentina. Kimberly-Clark eventually terminated the contract. Iraola then filed a lawsuit, alleging that Kimberly-Clark was tortiously interfering with Iraola’s business by distributing products through Robert Alpert, a former Iraola employee.

Iraola also included Geo Med, a Kimberly-Clark distributor in Argentina as a defendant but was unable to serve process upon it. Iraola at first thought that Geo Med was a Georgia company owned by a Kimberly-Clark employee. As it turned out during discovery, Robert Alpert, an Argentine citizen, owned Geo Med thus making it an unincorporated Argentine company.

The district court found that subject matter jurisdiction existed under 28 U.S.C. Section 1332(a)(2) [diversity where parties on one side are citizens of different states and party on other side is foreign]. Claiming that Geo Med’s presence stripped the court of diversity jurisdiction, Iraola moved for voluntary dismissal so that it could bring its claims against all parties jointly in state court. Over defendants’ opposition, the district court granted the motion.

On appeal, Iraola continued to argue that Section 1332(a)(2) does not permit Iraola - as a foreign company - to sue defendants from different states. Alternatively, it maintained that the inclusion of Geo Med defeated diversity jurisdiction. According to Iraola, all non-foreign parties have to be from a single state. Section 1332(a)(2) provides: “(a) The district courts shall have original jurisdiction of all civil actions where the matter in controversy ... is between (2) citizens of a State and citizens or subjects of a foreign state; ...” The U.S. Court of Appeals for the Eleventh Circuit affirms in part and vacates in part.

The Court first points out that all the courts that have addressed the issue have spurned Iraola’s theory. “Adopting Iraola’s interpretation would result in incongruous results. For example, a corporation which is a citizen of two states would not be able to bring suit against citizens of a foreign state in federal court while corporations with one citizenship could. We do not believe that Congress intended such a result. In rejecting the interpretation Iraola proffers, we join all of the courts that have specifically decided this issue and those that have assumed that the statute encompassed actions between citizens of a foreign state on one side and citizens from different states on the other.” [Slip Op. 15-16]

The Court then declares that federal courts generally have no diversity jurisdiction over cases where there are foreign entities on both sides of the action without the presence of state citizens on both sides. Further, federal law imputes the citizenship of unincorporated entities such as Geo Med to the citizenship of their owners, thus making Geo Med an Argentine entity. The Court, however, chooses to dismiss Geo Med to retain jurisdiction.

“Here, Iraola’s only claim of prejudice is that it will suffer a tactical disadvantage if Geo Med is dismissed from the action. ... The problem with this argument is that Iraola sought, and obtained from the district court, permission to voluntarily dismiss this action so that it could sue all of the defendants in state court. ... Thus, Iraola is now free to pursue its claim against Kimberly-Clark and Geo Med in state court ... We readily conclude that dismissing Geo Med as a dispensable party will not prejudice Iraola, and thus that Geo Med should be dismissed ...” [Slip Op. 18-19]

Citation: Iraola & Cia, S.A. v. Kimberly-Clark Corp., No. 99-8127 (11th Cir. November 9, 2000).

JURISDICTION (SUBJECT MATTER)

In dispute over letters of credit issued to Mexican companies by foreign bank headquartered in New York, Second Circuit holds that, even if foreign corporation maintains its principal place of business in U.S. State, presence of alien party on other side defeats diversity jurisdiction

Two Mexican garment manufacturers (“plaintiffs”) sued Mashreqbank PSC (incorporated in the United Arab Emirates) and Mashreqbank New York (jointly “defendant”) for alleged failure to honor two irrevocable letters of credit issued by the defendant on behalf of buyers of plaintiffs clothing.

The defendant claimed that the case did not meet the statutory requirements for diversity of 28 U.S.C. Section 1332(a)(2) because all parties were foreign with principal places of business outside the U.S.

The district court dismissed the action for lack of subject matter jurisdiction on these grounds, and this appeal ensued. The U.S. Court of Appeals for the Second Circuit, in a per curiam opinion, affirms.

First, the Court agrees with the district court that diversity under Section 1332(a)(2) is lacking. That the defendant has (in other proceedings) claimed to have its principal place of business in the U.S. is immaterial because estoppel does not apply to questions of subject matter jurisdiction. Even if its principal place of business were in the U.S., it would not create diversity jurisdiction in this case.

“The district court apparently assumed that if, as the plaintiffs argue, the defendant’s principal place of business were in New York, then diversity jurisdiction would exist by virtue of the bank’s corporate citizenship in that State ... This ignores our line of cases holding that ‘even if a corporation organized under the laws of a foreign nation maintains its principal place of business in a State, and is considered a citizen of that State, diversity is nonetheless defeated if another alien party is present on the other side of the litigation.’ ...” [Slip Op. 6]

Here, plaintiffs are Mexican companies while the defendant’s New York foreign bank license indicates that the parent company is incorporated in the United Arab Emirates. Thus, there is no need to address the question of the defendant’s principal place of business.

Citation: Creaciones con Idea, S.A. v. Mashreqbank PSC, No. 00-7011 (2d Cir. November 8, 2000).

SOVEREIGN IMMUNITY

Fifth Circuit affirms dismissal of workers’ action seeking damages for exposure to pesticides on banana farms in Central America, noting that Israel’s indirect ownership of defendant corporation was enough to confer status of “instrumentality of a foreign state” under Foreign Sovereign Immunities Act

The plaintiffs in the following six consolidated cases are several thousand agricultural workers who claimed exposure to the pesticide dibromochloropropane (DBCP) in several Central American countries including Costa Rica, Nicaragua and Panama. DBCP is a nematocide, used to kill ground worms in banana plantations. The exposure to DBCP allegedly caused plaintiffs many health problems such as birth defects and infertility.

Plaintiffs had initially filed in Texas state court at a time when Texas did not recognize the doctrine of forum non conveniens. The defendants are banana companies and manufacturers of DBCP who removed to federal court where forum non conveniens was available by impleading Dead Sea Bromine Company (DSB). The Israeli government is majority owner of the latter’s parent so that DSB became an “instrumentality of a foreign state” under the Foreign Sovereign Immunities Act (FSIA) [28 U.S.C. Sections 1602-1611]. DSB had voluntarily joined the action and had waived its immunity even though the plaintiffs’ complaint did not implicate DSB products.

The district court promptly dismissed five of the six cases on grounds of forum non conveniens, and this appeal ensued. The U.S. Court of Appeals for the Fifth Circuit affirms. Among other things, the Court finds that DSB is in fact an “agency or instrumentality of a foreign state” under the FSIA and that its joinder was proper procedurally even though that led to the removal and ultimate dismissal of the cases.

“The plain language of the statute simply requires ‘ownership’ by a foreign state. It draws no distinction between direct and indirect ownership; neither does it expressly impose a requirement of direct ownership. Indeed, we have previously indicated that indirect ownership is sufficient to confer foreign state status. ... Should any doubts remain concerning this Circuit’s position on tiering or indirect ownership, we squarely hold today that indirect or tiered majority ownership is sufficient to qualify an entity as a foreign state, assuming that all other requirements are met. ... We hold, therefore, that [DSB] is a foreign state for purposes of the FSIA and can create federal subject matter jurisdiction in actions that is properly removes [sic] to federal court.” [Slip. Op. 26-28]

The Court also spurns plaintiffs’ argument that defendants had “fraudulently” joined DSB only to invoke FSIA jurisdiction to make the cases removable to federal court and then to secure a dismissal on forum non conveniens grounds. Section 1359 of Title 28 bars removal to federal court in cases of fraudulent or collusive joinder of parties. The defendants, however, did not manufacture DSB’s status as a foreign sovereign.

“[W]hether we ought to apply the fraudulent joinder doctrine in situations where a third-party foreign sovereign is alleged to have been joined willingly and cooperatively to create jurisdiction as a basis for removal is complicated by the doctrine’s intersection with Congress’ paramount desire that a foreign sovereign have access to a federal forum to ensure uniformity in procedure and substance. ... We need not, and do not, resolve these issues today, for it is apparent that even if the fraudulent joinder doctrine were to apply to the instant case, Plaintiffs have failed to establish that [DSB] was fraudulently joined.” [Slip op. 35-36]

Citation: Delgado v. Shell Oil Company, Nos. 95-21074 & 97-20060 (5th Cir. October 19, 2000).

TAXATION

In dispute with Australian Tax Commissioner over taxable year in which American company earned capital gains from two-stage sale of its Australian subsidiary’s assets to Swiss Company, highest court of Australia upholds Commissioner

Nicholas Kiwi Pty. Ltd. was the former name of an Australian subsidiary of Sara Lee Corporation (SLC) of Maryland, USA. SLC does business in many other countries, the nature of it being the making, selling and distribution of pharmaceutical and health care products. In the early 1990's, Nicholas put its business on the auction market.

Roche Holding Ltd., a Swiss corporation (also with many foreign subsidiaries) was the successful bidder. Roche entered into a “Purchase and Sale Agreement” (PSA) with SLC and 24 named subsidiaries (sellers) including NKA on May 31, 1991.

A choice-of-law clause made English law applicable to the agreement. Under the PSA, Roche was to take over all of NKA’s health care assets. Under instructions from SLC, a Roche official signed the PSA, without the prior approval of its Board of Directors. The Board eventually ratified this action, however, on August 20, 1991.

Nicholas Products Pty. Ltd. (successor to NKA), a Roche subsidiary whose incorporation date was June 25 1991, obtained the transferred Australian health care assets from Roche. In an August 30, 1991 letter, Roche notified SLC that it had assigned some of its rights and duties under the PSA to several subsidiaries and affiliates, including NKA.

On August 30, 1991, SLC and Roche executed an “Amendment Agreement”(A/A) which, inter alia, increased the price of the assets sold by respondents by $1,000,000. It also cut back on the number of employees NKA was supposed to hire under the PSA from 54 to 14. The A/A expressly amended the PSA and also provided that, all unamended provisions of the PSA, remain “in full force and effect.”

As part of the closing on August 30, 1991, Roche as seller and NKA as buyer executed a “Deed of Assignment” (DOA). It declared that it was pursuant to the PSA and not by way of modification thereof and that, in case of conflict, the PSA was to control. Respondent and NKA also executed a "Deed of Assumption of Liabilities and Contracts" on August 30 described as “pursuant to” the PSA, as amended. It mainly dealt with NKA’s assumption of various obligations and liabilities having to do with intangible rights and assigned contracts.

The Australian tax authorities differed with SLC as to the date of the asset transfer. If the event took place in the 1992 income year, taxpayer-respondent would have offsetting losses or deductions that would lower the amount of its taxable capital gains. The outcome is otherwise if the controlling date was that of the contract’s execution in May 1991.

The Tax Commissioner lost before the Full Federal Court of three judges because it failed to persuade them that the taxable event had taken place in the tax year ending June 30,1991 -- the 1991 tax year -- rather than in the 1992 tax year. The Commissioner then obtained review in the High Court of Australia.

The High Court allows the Commissioner’s appeal. It first rules that the Board’s ratification of the previous unauthorized signing of the PSA related back to the date of the PSA, i.e., May 31, 1991. As to the effect of the A/A on the PSA, the High Court holds that the parties intended to vary the rights and liabilities of the PSA in certain important respects but not wholly to rescind and replace it. The Court also concludes that both the PSA and the A/A did not have in mind to transfer assets or liabilities on May 31, but, as was done, by separate deeds delivered at the closing on August 30, 1991.

Addressing the central issue, the High Court then determines the year in which the capital gains on the assets are taxable under PtIIIA of the Income Tax Assessment Act of 1936. Both sides argued on the assumption that the relevant change in asset ownership had taken place on August 30, i.e. in the 1992 tax year.

As to the timing of the asset disposal for tax purposes, the following two provisions apply. Section 160U(3) provides that: “Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.” The following provision, Section 160U(4), then declares that: “Where the asset was acquired or disposed of otherwise than under a contract, the time of acquisition or disposal shall be taken to have been the time when the change in the ownership of the asset that constituted or gave rise to the acquisition or disposal occurred.” [Emphasis supplied.]

Since the disposal of assets had taken place “under a contract,” Section 160U(3) controls. The bottom line for the High Court is as follows. “Where there are two or more contracts which affect the rights and obligations of the parties to a disposal of assets, the identification of the contract under which the assets were disposed of, for the purpose of applying s160U of the Act, requires a judgment as to which of the contracts is properly to be seen as the source of the obligation to effect the disposal. In the present case, that contract is the purchase and sale agreement of 31 May 1991.” [N/A]

The concurring judge agrees with the Tax Commissioner and would also allow the appeal. “In summary therefore, the disposition [of assets] in this case must be taken to have occurred on the making of the May [31, 1991] agreement ... by reason of the language of s160K(5), s160M(1), s160M(1A) and s160M(2), s160U(1) and s160U(2) and particularly s160U(3) of the Act.”

“On that date the respondent executed an agreement and entered into a transaction for the disposal of assets and became entitled (subject to the fulfilment of conditions precedent) to receive consideration which included a component of capital gain. The contract, although subsequently varied (albeit not very significantly in the overall scale of things) was made on 31 May 1991 and the relevant assets were disposed of under it on that date.” [N/A]

Citation: Commissioner of Taxation v. Sara Lee Household & Body Care (Australia) Pty. Ltd., [2000] H.C.A. 35 ( High Ct. of Aus. June 15).

TRADEMARKS

American owner of “Kickapoo Joy Juice” trademarks on soft drinks persuades Singapore Court of Appeal to uphold finding that local companies had breached their licenses to market these drinks in Singapore and Malaysia

The Monarch Company, Inc., a United States Corporation, is the present successor to the trademarks “Kickapoo Joy Juice” and “Kickapoo.” The previous owner had entered into a licensing agreement (the 1966 Agreement) with the National Aerated Water Company Ltd., (NAWC). It authorized NAWC to produce, distribute and sell bottled carbonated drinks under the above trademarks (“the Beverage”) in Singapore. A similar licensing agreement with NAWC (KL) covered Malaysia.

Under Clause 8 of the Agreement, NAWC was not to market any product on its own behalf that embodied or referred to the Beverage or to any part or syllable of its trademarks. NAWC’s breach of Clause 8 would grant Monarch the immediate right to rescind the Agreement.

Starting in 1986, Monarch’s predecessor orally allowed NAWC to sell the Beverage in clear plastic polythene (PET) bottles and in cans. From 1992 onwards, Monarch detected a poor sales record on the part of NAWC (KL) in East Malaysia. It announced plans to appoint a third party franchisee to market the canned Beverage in a region substantially overlapping NAWC (KL)’s territory and demanded the latter’s assurances that it would stop selling the canned Beverage in Malaysia.

When August 1994 arrived and NAWC had not given these assurances, Monarch terminated NAWC’s Singapore license but without giving the required thirty-day notice. NAWC ignored this repudiation and kept on marketing the canned Beverage in Singapore until 1996. Monarch later found out that NAWC was also marketing a drink called “Kick,” allegedly to make good use of the Beverage concentrates still in their inventory, so it terminated the entire Agreement pursuant to Clause 8. Despite this, NAWC went on selling the canned and PET-bottled beverage.

Monarch then sued NAWC in the Singapore courts for infringement of its registered mark and for passing-off, seeking injunctive relief and damages. NAWC denied any wrongdoing and counterclaimed for wrongful repudiation. The trial judge ruled in favor of Monarch and dismissed the counterclaim. On NAWC’s appeal, the Singapore Court of Appeal dismisses, citing precedents from Singapore and the United Kingdom.

In analyzing the Agreement, the Court decides that Clause 8 constituted an unreasonably broad restraint of trade, even though it was not to last beyond the life of the Agreement. Admittedly the parties had freely accepted Clause 8, but a mutual agreement among private parties cannot neutralize a doctrine based on public policy.

Monarch of course had some right to safeguard the distinctiveness of its trademark and to forestall NAWC from using similar marks for other carbonated drinks that might sow confusion in the marketplace. On the other hand, a restriction applicable to the two common English words “joy” and “juice” made it ex facie unreasonable on these points. It is not so clear, without more evidence, whether protecting each syllable of “Kickapoo” was also unreasonable.

Nevertheless, the severance doctrine partially rescues Monarch. “ [Clause 8] was intended to cover any of the syllables contained in the term 'Kickapoo Joy Juice' and could be construed as distinctive and separate restrictions in respect of each of them. The removal of the two words [’Joy Juice”] would not change the nature of the covenant which was to restrict the products which NAWC could sell, whilst the 1966 agreement was in force. More importantly, the severance of 'Joy Juice' from the restraint would, in fact, bring the protection within the legitimate ambit of what is the proprietary interest of Monarch in the trademark. ...”

“We would accordingly permit the severance of the two words 'Joy Juice' from the restraint clause. As NAWC has not demonstrated, apart from the public interest in an individual's freedom to trade, other tangible public interests that would be unreasonably affected by this reduced restraint, the restraint as so severed will be enforced.” [paras. 45-46]

In the Court’s view, NAWC’s choice to affirm the 1966 Agreement after Monarch’s improper termination in August 1994 turned the latter’s sale of the “Kick” drink before final termination in December 1994 into a breach of Clause 8. The Court also reads the oral licenses as merely technological updates of the main Agreement. Hence, the repudiation of the Agreement extended to the licenses. Finally, the Court of Appeal deletes that part of the injunction that extended the ban beyond the life of the 1966 Agreement, and spurns NAWC’s counterclaim.

Citation: National Aerated Water Co. Pte. Ltd. v. Monarch Co., Inc., [2000] 2 Sing. L. Rpt. 24 (Sing. Ct. App.).

EU amends pre-requisites for exchange of information outside Union. With Directive 2000/64/EC, the European Union has amended its Directives on the exchange of information with third countries. The new Directive would promote the exchange of information between EU and foreign government authorities. Member States may now conclude cooperation agreements with other countries that provide for the exchange of information if the foreign nation protects the information by guarantees of professional secrecy. The Member States have two years within which to transpose the EU standards into domestic law. Citation: 2000 O.J. of European Communities (L 290) 27, 17 November 2000.

Zimbabwe’s highest court finds forced land resettlements unconstitutional. The Supreme Court of Zimbabwe holds that President Robert Mugabe’s seizures of land from farmers are illegal. It also orders the government within 48 hours to remove self-styled war veterans from the farms they have been occupying since February 2000. In the Court’s view, the forced resettlement of farm land “contravened the fundamental right contained in the constitution of Zimbabwe.” The mostly white Commercial Farmers Union (CFU) had brought the lawsuit against the government. Mr. Mugabe had the constitution amended earlier this year to grant him the power to seize farms without compensation unless Britain (as the former colonial power) provided the necessary funds. The Court aimed its evacuation order at eleven government ministers who were dealing with the resettlement scheme plus the minister and commissioner of police. In power for twenty years, Mr. Mugabe has already expressed his determination to disregard any court order that would meddle with his redistribution plan. He claims to have designed it to correct the fact that 4,500 farmers own more than seventy percent of the land, a vestige of colonial rule. Citation: Reuters News Service, Harare, November 20, 2000.

EU Court of First Instance annuls Bayer AG’s fine. The European Commission had imposed a $2,490,000 fine on Bayer AG of Germany in January 1996 for allegedly putting up obstacles to re-exports of its “Adalat” heart drug. On October 26, 2000, the European Court of First Instance (CFI) annulled the fine. The CFI concluded that the Commission had failed to show that there was an illegal commercial agreement between Bayer and its Spanish and French wholesalers to limit parallel imports of Adalat to the U.K. where prices were substantially higher. In the CFI’s two-hundred page opinion, it established that the Commission had not met its burden of proving that the wholesalers had actually agreed with Bayer’s restrictive policies. A Commission spokeswoman said that the ruling was unlikely to stand as a test case for future decisions on parallel imports, since it rested not on the legal substance of the case but on the Commission's inability to prove the facts. Citation: Reuters News Service, Luxembourg, October 26, 2000; the 1996 Commission Decision was published in 1996 O.J. (L 201) 1, January 10, 1996.

Paris appeal court upholds dismissal of criminal charges in Diana accident case. On October 31, 2000, three judges of the Cour d’Appel in Paris upheld the dismissal of criminal charges over objections from Mohammed al Fayed. Mr. al Fayed had called upon the Court to have the nine pursuing “paparazzi” and one photo-agency motorcyclist charged in the death on August 31, 1997 of Princess Diana and plaintiff’s son, Dodi Fayed, in a high-speed collision with the structure of a Parisian underpass. In Mr. al Fayed’s view, the appropriate offenses would have been manslaughter and failing to help the victims. The Court also has affirmed the conclusions of two investigating magistrates below that the fault lay with Henri Paul, the limousine’s deceased French chauffeur, who had been driving while intoxicated and under the influence of anti-depressant drugs. Mr. al Fayed announced that he is seriously considering filing an appeal to the Cour de Cassation, France’s highest private law tribunal. He is also separately pursuing a civil action against the French government, claiming it had failed properly to investigate the accident. Citation: The Glasgow Herald, November 1, 2000, at page 14; Agence France Presse report of October 31, 2000.