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.

1997 International Law Update, Volume 3, Number 7 (July).

ARBITRATION

In suit for breach of oral contract between Russian and Liechtenstein companies, Fourth Circuit finds that New York Arbitration Convention does not generate federal jurisdiction in this case for lack of proof that parties agreed to arbitrate

Severonickel is a Russian company that had 800 tons of nickel powder stored in a Baltimore warehouse.  Pursuant to an oral contract with a Liechtenstein corporation controlled by a Belgian citizen, Gaston Reymenants (Reymenants) became the broker for the nickel powder.  After Reymenants allegedly failed to pay Severonickel and account for the sales of the nickel powder, Severonickel sued Reymenants for breach of contract in Maryland state court.  Invoking the New York Arbitration Convention [implemented in 9 U.S.C. 201-208], Reymenants removed the case to federal district court.

Severonickel argued that the federal court lacked jurisdiction because the oral contract did not include an arbitration clause and was not subject to an arbitration agreement.  On the other hand, Reymenants argued that a contract he had concluded with a Severonickel subsidiary, which incorporated the nickel sale, did include an arbitration clause.  Reymenants, however, failed to put this alleged contract into evidence.  The federal court therefore remanded the action to the Maryland court.  Reymenants appealed.

The U.S. Court of Appeals for the Fourth Circuit dismisses the case for lack of appellate jurisdiction.  Here, without proof of any arbitration agreement, the contract suit raises no federal question and there is no diversity jurisdiction.

A dissenting judge would remand and permit discovery regarding the question of arbitrability.  Generally, there is no jurisdiction in federal court over an action between foreign entities.  If, however, the parties have agreed to arbitrate the dispute, the Convention applies and opens up a federal forum. "Consequently, it cannot be said that the district court has jurisdiction under Title 28 until it is first decided that the dispute is arbitrable, but 9 U.S.C § 4 would literally require this jurisdiction to be present before the court decides arbitrability.  I think that the only way to harmonize these statutes in a way that makes any sense is to require the district court to decide arbitrability, i.e. to recognize that it has the mandatory jurisdiction to examine its own jurisdiction." [22-23]

Citation:  Severonickel v. Reymenants, No. 96-1000 (4th Cir. June 11, 1997).

AVIATION

In suit against El Al Airlines, Second Circuit rules that intrusive body search of female passenger not "accident" covered by Warsaw Convention but that passenger may pursue injury claims in state courts

On May 22, 1993, Tsui Yuan Tseng arrived at J.F.K. airport in New York bound for Tel Aviv.  When she gave "illogical" answers to routine questions, guards classified her as a "high risk" passenger and subjected her to a "security search."  This required her to remove her jacket and sweater and to lower her blue jeans to mid-hip level while a female guard manually search her entire body outside her clothing, including her breasts and groin area.  El Al had adopted these procedures pursuant to F.A.A. regulations.  Cleared of being a security risk, Tseng boarded her flight.  In addition, the airline allegedly lost or damaged her personal belongings. 

In May 1994, Tseng sued El Al in New York state court. In its capacity as an "agency or instrumentality of a foreign state" under § 1603(a) of the F.S.I.A., the airline removed the case to federal court.  In her federal suit, plaintiff won $1034.90 in property damages.  The district court, however, dismissed her personal injury claims based on the body search as not amounting to an "accident" that caused physical injury as required by the Warsaw Convention. 

The U.S. Court of Appeals for the Second Circuit affirms in part and reverses in part.  The Court first addresses whether the body search constituted an "accident" giving rise to liability for bodily injury under Article 17 of the Warsaw Convention [49 Stat. 3000, T.S. No. 876 (1934), reprinted in 49 U.S.C. § 40105 note].

In the Court's view, the term "accident" does not include those typical events to which a passenger has presumably consented, i.e., those injuries that take place in the normal operation of the aircraft.  For example, U.S. courts have held that the Convention does not apply to events such as a passenger's death by natural causes, fights between passengers, routine repressurization of the aircraft, and injuries resulting from intoxication.  Likewise, a security search is a routine airline procedure.  Furthermore, the Court does not wish to discourage international airlines from carrying out security checks.

"As a consequence, we hold that even though the event of which plaintiff complains occurred during the course of her embarkation on defendant's airplane, there was no accident and she suffered no bodily injury.  Hence, under the terms of Article 17 of the Warsaw Convention, El Al may not be held liable in damages to her." [3810]

The Court, however, next holds that the Convention is not the exclusive remedy for personal injuries sustained in the course of international air travel.  The exclusivity provisions of Article 24(2) of the Convention clearly bar resort to local laws only where Article 17 "covers" the incident.  The drafting history, other cases, and scholarly comments all indicate that state law could provide a passenger's remedy where the Convention did not expressly apply to a particular injury.  Though the House of Lords reading differs on this point, this Court sees its own interpretation as both shielding airlines from catastrophic judgments while protecting passengers hurt in the course of regular airline operations.

Citation: Tseng v. El Al Israel Airlines, Ltd., No. 96-7447 (2d Cir. June 13, 1997).

CHILD ABDUCTION

In case of first impression under Hague Child Abduction Convention that involves inconsistent rulings by U.S. and Swedish courts, Tenth Circuit holds Swedish forum more appropriate because "settled environment" defense would be available in Swedish proceeding brought by other party but not in U.S. proceeding

Six-year-old Julia is the child of Ms. Ohlander (Sweden) and Mr. Larson (Utah).  During the first years of her life, either her father or her mother repeatedly abducted Julia to Utah or Sweden, respectively.  Currently she is with her mother in Sweden.

The Hague Convention on the Civil Aspects of International Child Abduction [implemented in the U.S. through the International Child Abduction Remedies Act, 42 U.S.C. §§ 11601-11610 (1994)] serves "to protect children internationally from the harmful effects of their wrongful removal or retention and to establish procedures to ensure their prompt return to the State of their habitual residence." [preamble]  Both the U.S. and Sweden are parties to the Convention.

In 1993, Ms. Ohlander petitioned a federal court to order Julia's return to Sweden pursuant to the Convention.  Ms. Ohlander herself later abducted the child and ended up in Sweden. 

The district court denied Ms. Ohlander's petition under the Hague Convention for the return of her daughter to Sweden, as well as her motion to dismiss under Fed.R.Civ.P. 41(a)(2).  Based on her contumacious behavior, the court ordered the child's return to Utah.  At a later proceeding in Sweden brought by Mr. Larson, with both parents present, the Swedish Supreme Administrative Court held -- contrary to the U.S. district court's conclusion -- that Julia had been a "habitual resident" of Sweden.  Ms. Ohlander unsuccessfully sought to stay the enforcement of the U.S. district court judgment and she appealed.

In a case of first impression, the U.S. Court of Appeals for the Tenth Circuit reverses and remands with instructions to dismiss Ms. Ohlander's case.  The Court notes that the Convention should discourage parents from fleeing with the children in search of a favorable decision.  Therefore, a court must analyze (1) the competing interests of the district court in ensuring compliance with its orders, (2) the procedural conduct of the parties, and (3) the Convention's intent and the court's duty to carry it out.

In this case, the district court failed to consider Ms. Ohlander's motion to dismiss on the merits.  As for the procedural aspects of the Convention, a court should only consider the wrongfulness of a respondent's removal of a child.  Here, the district court ruled that the petitioner's removals of the child were improper.  When Mr. Larson filed his own petition in Sweden, he chose to have a Swedish court decide whether Ms. Ohlander's removals of the child were wrongful.

Furthermore, the district court's denial of Ms. Ohlander's motion to dismiss renders an important defense unavailable.  Under the Convention, if a parent files a petition a year after the child's removal or retention and the child has become settled in the new environment, the respondent can present a "settled environment" defense [Article 12].  When Ms. Ohlander filed her petition, she was asking for Julia's return to Sweden.  Any defenses under the Convention were available only to Mr. Larson. Once Mr. Larson filed his own petition in Sweden, however, that defense became available to Ms. Ohlander.  Since Mr. Larson, instead of filing a cross-petition in the U.S., chose to initiate a second proceeding in Sweden, Sweden was the jurisdiction where the parties could more fairly have their claims and defenses adjudicated.  The proper interpretation of the Convention weighs in favor of dismissing the U.S. action.

Instead of resolving the Fed.R.Civ.P. 41 issue, a dissenting judge would remand the matter to the district court to evaluate the issue.  As for additional factors influencing the outcome, the dissenter first suggests that the "settled environment" defense hinged on the timing of Mr. Larson's petition, not on whether the lower court should have granted Ms. Ohlander's motion to dismiss.  In addition, Mr. Larson had no choice but to file his petition in Sweden on jurisdictional grounds because Ms. Ohlander had taken the child there.  Finally, at the time of the U.S. district court dismissal, there was no contrary Swedish decision.

Citation:  Ohlander v. Larson, No. 95-4114 (10th Cir. June 3, 1997).

COPYRIGHT

In German civil action brought by U.S. singer Bob Dylan against unlicensed distributor of unauthorized recordings of his American concerts, German High Court holds that, though it cannot prevent distribution of these recordings, it does bar unconsented use of singer's picture

The defendant in the following case is the manager of a German company (defendant) that distributed music CDs of Bob Dylan's concerts.  The defendant had made those recordings in the U.S. without permission and distributed them in Germany with pictures of Bob Dylan on the cover.  Because of a gap in international copyright law, Dylan could not stop the distribution of the recordings. [Editors' Note:  The Berne Convention for the Protection of Literary and Artistic Works, 828 U.N.T.S. 221, does not protect sound recordings. This gap may be closed in the future under the WTO TRIPS Agreement, Annex 1 C].  Dylan, however, sued to stop the use of his image on the CDs.

The German district court found for Dylan.  The Appeals court dismissed the claim.  The German High Court (Bundesgerichtshof, BGH) now reinstates the district court judgment in favor of Dylan.

Under German law, third persons may use the image of a "historic personality" without that person's consent [§ 23 I Nr. 1 KUG].  The public has an interest in receiving information about such a person, for example to see how he holds the guitar, what the concert looked like, and so forth.  The image, however, should not "degrade" that person to a mere marketing object.  Such uses do not serve any public interest.

Here, the court has to balance the public's interest in receiving information about a subject with that person's justified interests.  The subject, however, does not have to allow the use of his or her images for marketing purposes.  Even though Dylan's pictures on the CDs have some informational content, the main purpose is to promote the sale of the CDs to the average person.

Citation:  BGH, Urteil vom 1.10.1996 - VI ZR 206/95 (Karlsruhe), reported in 1997 NJW, Heft 17, page 1152 (April 23, 1997).

EUROPEAN UNION LAW

European Court of Justice upholds Italy's action in seizing vessel and cargo headed for Montenegro pursuant to Italian law that implemented 1993 EU Regulation that required Member States to bar commercial traffic from Yugoslavian waters in conformity with U.N. Resolution

In 1993 the U.N. Security Council passed Resolution 820.  It imposed economic sanctions against Yugoslavia.  The EU then adopted Regulation 990/93 dealing with trade between the EU and Yugoslavia (Serbia and Montenegro).  Article 1 of the Regulation barred entry into Yugoslavia's territorial waters by all commercial traffic and any activity that promoted such entry.  Article 9 required that Member States detain for investigation all vessels and cargoes suspected of violating the Regulation.  Under Article 10, the Member States have to determine the sanctions to be imposed.  It also authorized, in all but the Italian and Finnish versions, the forfeiture of the seized vessels and cargoes to the detaining Member State.  Italy implemented the Regulation by Decree-Law 144 providing for forfeiture of both offending vessel and its cargo. 

In April 1994, the Lido II, a tanker belonging to Loden Navigation (Loden), a Maltese company, and flying the Maltese flag, sailed from a port in Tunisia bound for Croatia with a cargo of petroleum products belong to Ebony Maritime SA (Ebony), a Liberian company.  After passing inspection in Brindisi, Lido II had set sail for Croatian ports.  Later, however, the vessel allegedly began to take on water.  The master sent out distress signals that declared he was changing course to the nearest coastline of Montenegro where he intended to ground the ship.  While the ship was still in international waters, however, Dutch troops from NATO/WEU forces boarded Lido II.  They arranged for its tow back to Brindisi where they turned the ship over to Italian authorities.  Pursuant to Decree-Law 144, the local Prefect ordered the impoundment of the vessel and the seizure of its cargo.

Loden and Ebony sued to annul that decision in the Italian courts.  Having lost at first instance, they appealed to the Consiglio di Stato.  Pursuant to Article 177 of the EU Treaty, that court referred several questions to the European Court of Justice (ECJ) as to whether the Regulation had authorized the seizure under the above circumstances.  Particular points raised were that the ship did not fly the flag of a Member State; that the owners of vessel and cargo were non-EU entities; that the seizure had not taken place within the territorial waters of a Member State, that the Italian version of the Regulation did not authorize confiscation of cargoes and that Decree-Law 144 had improperly created a system of strict liability that violated the principle of nulla poena sine culpa.

The ECJ answers the reference as follows.  Regulation 990/93 authorized detention of all vessels of whatever ownership or flag even outside EU territory whenever violation of the embargo is shown.  The only place a ship could violate a ban on entry into Yugoslavia's territorial sea necessarily lies outside of EU territory.  Once a Member State has the violating vessel within its territory as here, the Regulation could validly demand that the Member State detain and, where appropriate, confiscate the vessel and its cargo.

Moreover, in order to make Regulation 990/93 effective, the ECJ finds it logical to read its provisions as applying to conduct in international waters when there was reason to believe that the seized vessel had been on course to Yugoslavian waters for the purposes of commercial traffic.  While the Italian version of Article 10, para 2 of the Regulation had erroneously failed to provide for forfeiture of cargoes, the ECJ read it in light of the presence of such provisions in the other nine official EU translations and in U.N. Resolution 820.

Finally, if an EU regulation does not provide any specific penalty for violation or refers to national law, Article 5 of the EU Treaty requires all Member States to ensure that national law penalizes infringements of EU law in a manner comparable to penalties for breaching similar provisions of domestic law.  The penalty, the Court stresses, should be effective, proportionate and dissuasive.  Nor does EU law exclude strict liability from meeting those criteria.  "In making that determination, the [Italian courts] must take account, in particular, of the fact that the objective pursued by the Regulation which is to bring to an end the state of war in the region concerned and the massive violations of human rights and humanitarian international law in the Republic of Bosnia-Herzegovina, is one of fundamental general interest for the international community." [49]

Citation: Ebony Maritime SA v. Prefetto della Provincia di Brindisi, (Case C-177/95), [1997] 2 C.M.L.R. 24.

FOREIGN SOVEREIGN

IMMUNITY

Congress has added narrow exception to § 1605 of FSIA to provide jurisdiction for federal damage suits by U.S. nationals against seven designated terrorist states for damages resulting from torture, extrajudicial killing, aircraft sabotage or hostage taking

Effective April 24, 1996 (as technically amended in April 25, 1997), Congress added § 1605(a)(7) to the Foreign Sovereign Immunities Act (FSIA) as part of the U.S. Antiterrorism and Effective Death Penalty Act of 1996.  It generally removes state immunity from suit in federal court as to cases not within the "commercial act" exception where plaintiff sues a foreign state for personal injury or death caused by an act of torture, extrajudicial killing, aircraft sabotage, hostage taking or providing material support or resources for such an act [see 18 U.S.C. § 2339A] if an agent of a foreign state acting within the scope of his or her employment or agency engaged in the specified conduct.

The statute incorporates by reference several key definitions from other legal sources.  It uses the terms "torture" and "extrajudicial killing" with the meaning given in § 3 of the Torture Victim Protection Act of 1991 [Pub.L. No.102-256, see Note after 28 U.S.C. § 1350]. [Editors' Note: The TVPA provides for federal jurisdiction over damage suits by any individual against the individual perpetrator of the torture without restrictions as to the nation involved; P.L. 104-208 provides for a substantive cause of action for damages against the offending official of a state sponsor of terrorism involved in a 28 U.S.C. § 1605(a)(7) suit]. 

The term "hostage taking" has the same meaning as in Article 1 of the International Convention Against the Taking of Hostages [T.I.A.S. No. 11081, 18 I.L.M 1486 (in force for U.S. January 6, 1985].  Finally, the new statute uses the term "aircraft sabotage" in the same sense as in Article I of the 1971 Convention for the Suppression of Unlawful Acts Against the Safety of Civil Aviation [24 U.S.T. 564].

Major restrictions, however, then follow.  For one thing, the exception applies only to wrongs committed by those foreign states that the U.S. government has designated as a "state sponsor of terrorism" under either 50 U.S.C App. 2405(j) or 22 U.S.C. 2371 at the time of the specified acts "unless later so designated as a result of such act." [Editors' Note: There are only seven designated states now on the list: Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria].

Even as to the seven designated states, the plaintiff must show that he or she has afforded the offending foreign state "a reasonable opportunity to arbitrate the claim in accordance with accepted international rules of arbitration."  A further condition is that either the claimant or the victim must have been a "national of the United States" as defined in § 101(a)(22) of the Immigration and Nationality Act when the complained of conduct took place.

Plaintiffs must file suit not later than ten years after the cause of action arose.  The statute directs the federal courts to calculate this period in the light of equitable tolling principles "including the period during which the foreign state was immune from suit."

Congress also relaxed somewhat the scope of jurisdiction to attach assets of the foreign state under § 1610 to enforce a judgment.  For example, the new § 1610(a) provides that, in case of an action under exception (7) against a foreign state, it will not matter whether the property is or was involved with the action upon which the claim is based.

The amendment also sets forth various protective measures the government may take when it appears that discovery in a § 1605(a)(7) action may significantly interfere with a related criminal investigation or prosecution or with a "national security operation" as certified to the court by the Attorney General.

Citation: Foreign Sovereign Immunities Act of 1976, as amended by 28 U.S.C. §§ 1605(a)(7), 1610(a)(7), 1610(b)(2) (1996/1997).

INTERNATIONAL COURT

OF JUSTICE

In unprecedented move, International Court of Justice visits Gabcikovo hydroelectric project along Danube to personally assess claims of Hungary that Slovakian project is crippling one of Europe's vital wetlands

[Socialist Hungary and Slovakia had joined forces to create twin hydroelectric projects along the main channel of the Danube that forms the borders of the two countries.  Upon the fall of the Iron Curtain in 1989, however, the Republic of Hungary pulled out of the project, citing projected environmental damage to 90% of the flora and fauna in these major European wetlands.  The Slovak Republic continued work on its part of the project and, in 1993, diverted 80% of the Danube's flow to generate electricity.  Hungary and Slovakia then agreed to have the ICJ decide their dispute. A complicating factor is that Germany has already spent $2.3 billion to build the Rhine-Main-Danube Canal expecting that the shipping locks of the hydro project would keep the Danube navigable year round.]

In June 1995, Slovakia asked the World Court to exercise its powers under Article 66 of its Rules and to visit the situs of the project to obtain first-hand evidence of its effects on the environment.  Hungary agreed and made joint arrangements for the Court's visit.  In December 1996, the President of the Court met with agents of the contending parties and made final and detailed arrangements as to the view. 

On February 5, 1997, the Court issued its order in part as follows: "Whereas it appears to the Court that to exercise its functions with regard to the obtaining of evidence at a place or locality to which the case relates may facilitate its task in the instant case, and whereas the proposals made by the Parties to that end may be accepted, THE COURT, Unanimously ... decides to exercise its functions with regard to the obtaining of evidence by visiting a place or locality to which the case relates...."

[This is reportedly the first time this Court has made use of Article 66 of its Rules.  The visit took place between April 1 and 4, 1997.  Observers expect that the Court will issue its ruling on the merits next Fall].

Citation: Case Concerning the Gabcikovo-Magymaros Project (Hungary/Slovakia, 1997 I.C.J. 3. [Background material in brackets derived from Drake/Maurer article in Business Week for May 19, 1997].

JURISDICTION

(SUBJECT MATTER)

In civil RICO action by Jersey corporation against U.S. citizens, Ninth Circuit declines to enforce contract clause choosing Jersey law that does not recognize RICO claims thus barring federal subject matter jurisdiction

The following matters derive from allegations in the pleadings.  Arthur I. Trueger is an American national, residing in California.  He was one of six directors of American Endeavour Fund, Ltd. (Endeavour) who played a primary role in certain corporate investments.  Trueger was also board chairman of Berkeley Govett International Ltd. (BGIL).  He also dominated the operations of Berkeley International Capital Corporation (Berkeley) as well as Govett and Co., Ltd. (Govett). 

A financial service group, Govett is incorporated under the laws of the Bailiwick of Jersey, Channel Islands.  Trading its shares on the London exchange and in the U.S. on NASDAQ, Govett engages in substantial business activity in California directly and via its affiliates and subsidiaries.  BGIL is a wholly owned Jersey subsidiary of Govett.  Berkeley is also a wholly-owned California subsidiary of Govett having its principal place of business in that state.  Endeavour is a Jersey corporation set up as a closed-end investment fund with its principal place of business on that island.  Though its shares are traded on the London exchange, it has invested 90% of its assets in the securities of American companies.

In 1988, Endeavour and BGIL entered into a management agreement (MA).  Under it BGIL would handle the day-to-day investment of Endeavour's assets.  The MA exonerated BGIL from liability for anything done in good faith except in case of "wilful default or negligence."  Paragraph 23 of the MA stated: "This Agreement shall be governed by and construed in accordance with the laws of Jersey and the parties hereby submit to the non-exclusive jurisdiction of the Royal Court of Jersey."  At the same time, Trueger had BGIL hire Berkeley as investment advisor pursuant to a Consultancy Agreement (CA).  In addition to a choice-of-law provision similar to Para 23 of the MA, the CA contained Berkeley's assurances that it would comply with U.S. federal and state laws as far as practicable. 

Trueger, Berkeley and BGIL, however, jointly caused Endeavour to invest in various American companies which then paid them kickbacks and secret fees going into the millions of dollars.  In February 1995, Endeavour filed suit against Trueger, Berkeley, Govett and BGIL, charging violations of RICO, wire and securities fraud, and bribery under California law.  Plaintiff alleged these as predicate acts under RICO.  Plaintiff also claimed common law fraud and breach of fiduciary duties toward Endeavour and various breaches of contract.  The complaint sought treble damages in the amount of not less than $60,000,000.  Defendants moved to dismiss and presented expert evidence that Jersey law applies to the entire relationship and that it does not recognize a cause of action under RICO.  The district court agreed and dismissed the action for lack of subject matter jurisdiction.

In a two-to-one vote, a panel of the U.S. Court of Appeals for the Ninth Circuit reverses and remands.  It acknowledges the civil effects of the various clauses selecting Jersey law, but declines to recognize that a contract waiver can avoid the application of American law to alleged tortious acts that also amount to federal crimes.  Noting that Jersey is an island off the coast of France of 44 square miles with a population of 84,000, the Court declares: "If contracts made in Jersey could grant immunity from the criminal laws of the United States, Jersey would indeed be the Mouse that Roared.  But we do not premise our decision on the size of this island.  The principle is the same as to any attempt by contract referring to foreign law to save from criminal or tort liability acts performed in the United States by citizens of the United States involving investments in companies in the United States.  Contract just doesn't do the job." [1022]

As to the allegations of fraud under the 1933 and 1934 Securities Acts, the Court cites its recent opinion in Richards v. Lloyd's, 107 F.3d 1422 (9th Cir. 1997), 1997 Int'l L. Update 39, holding that the Acts expressly void any contract that would prospectively waive the protections of the Securities laws.  Thus, the alleged acts of securities fraud are valid predicates for a RICO cause of action and hence for federal jurisdiction.  On the other hand, the district court should apply familiar principles of pendent jurisdiction to the California and common law claims.  In the Court's view, there seemingly would no bar to applying Jersey law to the conduct set out in these allegations.

A dissenting judge agrees with the district court.  In his view, defendants could not have engaged in any of their alleged misconduct but for the relationships among the various parties created by their contracts.  Applying § 187(2) of the Restatement of Conflicts (2nd), the judge argues that Jersey has just as much interest in preventing foreign citizens from defrauding Jersey citizens as does the United States in precluding U.S. citizens from defrauding a foreign plaintiff.  Moreover, effectuating this contract clause can in no way prevent the U.S. Justice Department from prosecuting defendants for any alleged criminal acts.  Finally, Endeavour can still pursue its non-federal claims under Jersey law in American state courts or in the tribunals of Jersey.

Citation: American Endeavour Fund, Ltd. v. Trueger, 112 F.3d 1017 (9th Cir. 1997).

In action by 700 Peruvians against Delaware corporation, Fifth Circuit in matter of first impression determines that U.S. company with principal place of business abroad is solely citizen of state of incorporation for purposes of diversity jurisdiction

About 700 Peruvian citizens sued Southern Peru Copper Corporation (SPCC) (and other defendants) in Texas state court for alleged tortious injuries caused by exposure to sulfur dioxide emissions from SPCC's smelting and refining plant in Ilo, Peru.  The defendant removed the case to federal court.  The district court denied plaintiffs' motion for remand to state court for lack of federal subject matter jurisdiction.  Instead, it dismissed on grounds of forum non conveniens and international comity.

The U.S. Court of Appeals for the Fifth Circuit affirms on more basic grounds.  The first inquiry must be whether the district court had subject matter jurisdiction.  The doctrines of forum non conveniens and comity can never apply if the court lacks judicial power to make such rulings.  The plaintiff's complaint raises substantial questions of federal common law by implicating foreign policy concerns.  The government of Peru protested the lawsuit by letter and in an amicus brief.  Peru's mining industry, of which SPCC is the largest enterprise, is crucial to the Peruvian economy, accounting for 50% of its export income and 11% of Peru's GDP. 

Furthermore, the Peruvian government has been substantially involved in the defendant's activities.  Peru owns the mining site, granted the concession, and owned the entire operation for several years during which some of the alleged injuries may have taken place.  Since this action strikes at Peru's vital economic and sovereign interests by seeking damages for activities in which the government has been actively involved, the district court had federal question jurisdiction.

As to diversity jurisdiction, an issue of first impression is SPCC's jurisdictional "citizenship" for it is incorporated in Delaware but has its principal place of business in Peru.  Under 28 U.S.C. 1332(c)(1), "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business..."  Section 1332(c)(1) thus provides no guidance on the impact of foreign citizenship.

"Outside of section 1332(c)(1), we are aware of no authority for classifying a corporation as a citizen of the place where it has its principal business.  We therefore resort to our traditional legal framework in which a corporation is deemed to be a citizen of its place of incorporation.  Absent congressional amendment to section 1332(c)(1) to the contrary, we must conclude that for diversity purposes a corporation incorporated in the United States with its principal place of business abroad is solely a citizen of its 'State' of incorporation." [3371]  Consequently, there is diversity jurisdiction in this suit between the Peruvian plaintiffs and SPCC.

Without elaboration, however, the Court finds no abuse of discretion in dismissing the case based on forum non conveniens and comity among nations.

Citation: Torres v. Southern Peru Copper Corp., No. 96-40203 (5th Cir. May 19, 1997).

German district court holds that defamation action based on false information published on internet may be heard by court in "any place" where message can be received

The plaintiff in the following German case manufactures licensed Amiga computer kits, including one that it distributes nationwide through mail order at issue here.  It sued a competitor who also distributes computer kits and who issued a "product review" of the plaintiff's product via the internet.  The review stated, among other things, that the plaintiff's do-it-yourself kit arrives in a box largely filled with trash (styrofoam pieces, shredded plastic bags).  The reviewer also stated that he was so frustrated with the product that he didn't feel like putting the "crap with the price of a Ferrari" back in the box to return it.

Plaintiff obtained a preliminary injunction in a German court in Munich against using such terms as trash, crap, scrap yard, and so forth, when describing the plaintiff's product.  The defendant objected to the injunction and challenged the court's jurisdiction.  The district court Munich I finds that jurisdiction can be had "anywhere that a person can receive the defamatory internet message." [Editors' Note: The court does not explain whether, for jurisdictional purposes, the internet message must be sent from within Germany, or whether this rule would apply also to messages coming from abroad].  Based on the German Law Against Improper Competition (Gesetz gegen den unlauteren Wettbewerb, UWG), the Munich district court has jurisdiction because the alleged act has caused an injury to plaintiff's business reputation in Munich. 

On the merits, the review falsely states that plaintiff packages its computer kits with "trash" such as styrofoam pieces and shredded plastic bags.  The Court points out that the concept of what constitutes "trash" has changed in recent years.  In today's world, people should not treat recyclable resources such as plastic bags and styrofoam as trash but should reuse them.  In this case, plaintiff used the materials for another purpose, namely packaging the computer kit.  The defendant's statement that the plaintiff's packages its product with "trash" is thus defamatory and harmful to plaintiff's business.

On the other hand, the reviewer's statements that the product is "crap" or "a pile of scrap metal," constitute normative opinions.  The German Supreme Court (BGH) and the Constitutional Tribunal (BVerfG) have held that strong criticism per se is not necessarily defamatory.  Defamation occurs when the object of the criticism is a person rather than an issue.  In this case, however, the defendant's information crossed that line since the statements lack a minimum factual basis.  "Crap" is something that does not serve any purpose; "a pile of scrap metal" means material that people have thrown away because it no longer has a function.  Even though the reviewer admitted that he was ultimately able to assemble the computer kit, this does not make up for the incorrect references to "crap" and "scrap metal."

The Court also notes that even though morals and virtues are declining on the internet generally, there is no reason to accept illegal behavior on that medium.

Citation:  LG München I, Urteil vom 17. Oktober 1996 -- 4 HKO 12190/96, reported in CR 3/1997, page 155.

In business tort action by U.S. company against German company for alleged monopolization of European gas market, Fifth Circuit declines to find federal subject matter jurisdiction

Marathon Oil Co., a U.S. company, became involved in North Sea gas exploration when one of its affiliates bought a European company with a gas exploration license (jointly Marathon).  Marathon later entered into oral and written agreements with several European companies, including German Ruhrgas A.G., Germany's primary gas company.  The European companies allegedly conspired to monopolize the European gas market by funneling a large portion of the North Sea gas reserves to Ruhrgas refining facilities in Germany.  Ruhrgas provided Marathon with $300 million in incentives for taking part in prospecting.  It also allegedly made false promises of premium prices for gas sales and favorable transportation tariffs.

Disappointed with the gas prices and the transportation tariffs, Marathon and Marathon Norge of Norway eventually sued Ruhrgas in Texas state court for fraud, civil conspiracy, and business torts.  Ruhrgas removed the case to federal court and the court granted Ruhrgas' motion to dismiss for lack of personal jurisdiction.  Ruhrgas then unsuccessfully moved for reconsideration and urged the court to halt all U.S. proceedings pending compelled arbitration in Europe.  All parties appealed.

Ignoring the lower court's ruling on personal jurisdiction, the U.S. Court of Appeals for the Fifth Circuit vacates and remands to state court on the more basic issue of lack of subject matter jurisdiction. 

The Court first notes that diversity jurisdiction is lacking since alien corporations (Norge and Ruhrgas) are on opposite sides of the litigation.  Ruhrgas then argues that Marathon had fraudulently joined Norge as plaintiff precisely to defeat federal diversity jurisdiction.  The Court concedes that the legal rights and duties of Norge as yet do not clearly appear in the record and the Texas courts will probably apply Norwegian law to resolve these difficult issues.  In any event, Ruhrgas has failed to show fraudulent joinder by clear and convincing evidence.

The Court also fails to find federal question jurisdiction.  It rejects Ruhrgas' arguments that Marathon's claims raised substantial questions of foreign and international relations, as well as international law and act-of-state questions, which form part of the federal common law. 

"Ruhrgas appears to be an important gas supplier in Germany and western Europe but this action does not strike at the sovereignty of a foreign nation.  The plaintiffs' claims do not call into question official German policy decisions and the Republic of Germany was not a participant in the activities giving rise to the suit.  This litigation does not seek to impose liability for injuries to foreign citizens occurring solely on foreign soil ...  Indeed, Ruhrgas allegedly came to the United States and defrauded a United States company on American soil." [13-14]

Finally, the Court rejects Ruhrgas' claim that the case is removable under 9 U.S.C. § 205 because the plaintiffs' claims relate to an arbitration agreement under the New York Convention.  An arbitration agreement or award falling under the Convention is one that arises out of an international commercial legal relationship.  The Marathon companies, however, were not parties to any arbitration proceeding.  The question here is whether any relevant arbitration agreement existed between the parties.

The Court spurns Ruhrgas' argument that this lawsuit is an attempt to circumvent an arbitration agreement that exists with one of the Marathon subsidiaries.  Here, Marathon is seeking redress for wrongs done to a subsidiary.  That Ruhrgas may have effectuated the alleged fraud through a contractual relationship does not necessarily mean that Marathon is seeking damages for harm done to one of its subsidiaries.  Furthermore, Marathon is not seeking damages for any breach of contract -- in fact, there was no contract between Marathon and Ruhrgas.

Citation: Marathon Oil Co. v. Ruhrgas, A.G., No. 96-20361 (5th Cir. June 10, 1997).

SEA, LAW OF

U.S. Supreme Court upholds claims of United States to minerals beneath submerged lands along Alaska's North Slope within National Petroleum Reserve-Alaska and Arctic National Wildlife Refuge as consistent with federal statutes and Territorial Sea Convention

Both the United States and Alaska seek to obtain the revenues from leasing extensive oil deposits in tidal regions off Alaska's North Slope.  The Alaska Statehood Act [§ 6(m), Pub. Law 85-508, 72 Stat. 343(1958)] provided that the federal Submerged Lands Act of 1953 [43 U.S.C. § 1301 ff] would apply to Alaska.  The latter Act gave Alaska the right to submerged lands beneath tidal and inland navigable waters.  It also granted Alaska sovereignty over submerged lands extending three miles seaward of the State's coastline that would otherwise fall within paramount U.S. sovereignty. 

During the 1970's, the federal government claimed a right to offer lands in the Beaufort Sea along Alaska's Arctic coast for mineral leasing.  On the other hand, Alaska sought to quiet its title to coastal submerged lands within two federal reservations, the National Petroleum Reserve‑Alaska (Reserve) and the Arctic National Wildlife Refuge, formerly known as the Arctic National Wildlife Range (Range). 

With leave, the United States filed an original action in the U.S. Supreme Court in 1979 to which Alaska filed counterclaims.  The Court in turn appointed a Special Master who held extensive hearings between 1980 and 1986 and made recommended rulings.  Both parties have filed exceptions to the Special Master's Report.

The Special Master first recommended that the Court should measure the State's submerged lands near barrier islands along its Arctic Coast as a 3‑mile belt from a coastline following the normal "baseline" under the 1958 Convention on the Territorial Sea and the Contiguous Zone (Convention) [15 U.S.T. 1606].  Alaska, however, objected to the application of this approach to the Stefansson Sound where some offshore islands lie more than six miles apart or more than six miles from the mainland.  Alaska argued that, beneath waters more than three miles from the mainland but not within three miles of an island, the United States would acquire "enclaves" of submerged lands in the Sound, wholly or partly surrounded by state‑owned submerged lands.

In an opinion by Justice Sandra Day O'Connor, joined by Justices Stevens, Kennedy, Souter, Ginsburg and Breyer, the Supreme Court disagrees with the State.  The coastline from which a State measures its Submerged Lands Act grant conforms to the baseline from which the United States gauges its territorial sea under the Convention.  According to the Convention's normal baseline approach, each island has its own belt of territorial sea, measured outward from a baseline corresponding to the low‑water line along the island's coast. 

In Justice O'Connor's view, Alaska has not identified a firm and continuing United States rule treating waters between the mainland and fringing islands as "inland waters" when the openings between the off‑lying islands are no more than 10 miles wide.  Nor has the United States exercised its discretion to draw straight baselines as allowed by Article 4 of the Convention.

Alaska also complained of the Master's recommendation that the Court should not treat a gravel and ice formation known as Dinkum Sands as an island constituting part of Alaska's coastline under the Submerged Lands Act.  Justice O'Connor, however, sees no merit in this objection.  The Master correctly decided that Dinkum Sands did not qualify as an "island" because it is often below mean high water.  The Convention's drafting history suggests that, to qualify as an island, a feature must be above high water except in abnormal circumstances.

Over Alaska's objection, the Special Master also suggested that the Court hold that submerged lands beneath tidally influenced waters within the Reserve's boundary did not pass to Alaska at statehood.  Justice O'Connor, however, agrees with the Master.  The United States can reserve submerged lands under federal control for an appropriate public purpose.  The Executive Order creating the Reserve in 1923 clearly aimed to embrace submerged lands within the Reserve.  Section 11(b) of the Alaska Statehood Act, showed Congress' intent not only to approve the inclusion of submerged lands within the Reserve but also to overcome the State's title to those lands. 

Finally, the United States objected to the Master's recommendation that the Court rule that offshore submerged lands within the Range's boundaries passed to Alaska at statehood.  Justice O'Connor agrees with the federal government on this point.  The United States did not give over these lands to Alaska at statehood.  The 1957 application from the Bureau of Sport Fisheries and Wildlife to set up a wildlife refuge plainly embraced submerged lands.  The Range has to include the tidelands because its seaward boundary is the low water line along Alaska's coast.  The detailed justification statement that went along with the application, clearly revealed a purpose to retain submerged lands.  At the time of Alaskan statehood, the federal government had set apart all of the lands covered by the 1957 application.  Hence, the United States kept its title to submerged lands within the Range. 

Citation: United States v. State of Alaska, No. 84 (orig) (U.S. S.Ct., June 19, 1997).

TAXATION

In case of interest payments by U.S. company to Netherlands Antilles finance subsidiary established to obtain low-interest financing, Seventh Circuit rules that payments were exempt from withholding tax under U.S. - Netherlands Income Tax Convention

Northern Indiana Public Service Company (Taxpayer) is a domestic public utility company which organized a finance subsidiary (Finance) in the Netherlands Antilles.  Finance issued notes in the Eurobond market and lent the proceeds to taxpayer for expanding its facilities.

[The Eurobond market is a major capital market network outside the U.S., issuing market bonds by private corporations, foreign governments, and other borrowers.  U.S corporations have issued bonds in the Eurobond market free of U.S. withholding tax through the use of international finance subsidiaries, almost all of which were incorporated in the Netherlands Antilles].

According to the Internal Revenue Code, a domestic taxpayer had to withhold a 30% tax on interest paid to nonresident aliens or foreign corporations [I.R.C. §§ 871(a), 881(a)].  At the time of the transactions at issue, however, interest payments by a U.S. corporation to a Netherlands Antilles corporation were exempt from withholding tax, pursuant to Article VIII of the U.S.-Netherlands Income Tax Convention (Treaty) [62 Stat. 1757, T.I.A.S. No. 1855, extended to the Netherlands Antilles by Protocol, 6 U.S.T. 3696, T.I.A.S. No. 3366, amended by Protocol, 15 U.S.T. 1900, T.I.A.S. No. 5665, modified by Convention, 17 U.S.T. 896, T.I.A.S. No. 6051] Article VIII provides that "interest (on bonds, securities, notes, debentures or on any other form of indebtedness), derived from sources within the United States by a resident or corporation of the Netherlands not engaged in trade or business in the United States through a permanent establishment shall be exempt from U.S. tax ..."

Taxpayer structured the transaction to avoid the withholding tax.  In 1984 Congress eliminated the 30% withholding on "portfolio interest" (including Eurobonds) paid by U.S. sources to non-resident individuals or foreign corporations, thus providing U.S. taxpayers direct access to the Eurobond market.

In 1981, Finance issued more than $70 million in notes in the Eurobond market and remitted the proceeds to taxpayer.  Each of the following years, Taxpayer paid Finance more than $12 million in interest and did not withhold any U.S. tax on the payments.  Later in 1985, Taxpayer paid off the principal plus accrued interest.  Finance redeemed the Euronotes, was liquidated, and the assets were distributed to Taxpayer.

Taxpayer did not report the interest payments to Finance.  The Internal Revenue Service later required Taxpayer to pay the withholding on the interest payments.  The Tax Court, however, found that, under the Treaty, Taxpayer was not liable for the alleged deficiencies because Finance was recognizable for tax purposes as engaging in borrowing and lending at a profit.

The U.S. Court of Appeals for the Seventh Circuit affirms, holding that the payments fell within the ambit of the Convention and are exempt from U.S. taxation.

The dispute here centers on the legal significance of Taxpayer's tax-avoidance motive.  "Transactions involving a foreign corporation are to be disregarded for lack of meaningful economic activity if the corporation is merely transitory, engaging in absolutely no business activity for profit -- in other words, it is a 'mere skeleton.' ... Transactions will also be disregarded if the foreign corporation lacks dominion and control over the interest payments it collects.  In this case, Finance was set up to obtain capital at the lowest possible interest rates.  Accessing the Eurobond market through a Netherlands Antilles subsidiary was not, at the time, an uncommon practice to accomplish this end. ... Significantly, Finance derived a profit.  It earned income on the spread between the interest rate it charged Taxpayer on the note ... and the rate it paid to the Euronote holders." [20-21]  Finance carried on enough business activity to require recognition of the transaction.

Citation: Northern Indiana Public Service Co. v. Commissioner of Internal Revenue, No. 96-1659 (7th Cir. June 6, 1997).

TELECOMMUNICATIONS

To comply with WTO telecommunications open-markets agreement, FCC issues rules for foreign participants in U.S. telecom market

Based on the WTO agreement to open markets for basic telecommunication services, the U.S. Federal Communications Commission (FCC) has issued a final rule for foreign carriers entering the U.S. telecom market [see 47 C.F.R. Part 63].

The WTO agreement covers 95% of the international telecom market and requires the parties to open their markets [see 1997 Int'l L. Update 36].  To meet those requirements, the FCC revised the current U.S. regulations to, for example:

- Revise the equivalency test in authorizing the use of private lines between the U.S. and all other countries for switched services, requiring, for example, that the charges, terms and conditions be "reasonable and nondiscriminatory." Applications for international common carriers must include that information.

- Require notification of foreign carriers' plans to invest in an authorized carrier in the U.S.

The effective date of the rules is July 17, 1997.

Citation:  62 Federal Register 32964 (June 17, 1997).

TRADE

European Union, Canada and U.S. conclude Mutual Recognition Agreements to facilitate the sale of certain products in each other's markets

The EU has concluded treaties with the U.S. and Canada to simplify the selling of products in each other's markets.  The "Mutual Recognition Agreement" (MRA) with the U.S. will cover $40 billion in transatlantic trade.  For example, this MRA includes telecommunications equipment, medical devices, pharmaceuticals and  recreational craft such as speed boats and sailing boats.  It deals as well with electromagnetic compatibility and the safety of electric equipment.

This MRA enables the maker of a European product that has passed EU quality and safety tests to market that item in the U.S. without additional certification procedures, subject to transitional periods between 18 and 36 months.  The MRAs should both lower consumer prices and reduce the "time-to-market" period.

The MRA spells out the rights and duties of the parties, and sets up a Joint Committee to administer its provisions.  The industrial sectors that it currently covers are as follows:

- Pharmaceuticals:  The EU and the U.S. will mutually accept products that meet "Good Manufacturing Practice" (GMP) (international pharmaceutical manufacturing standards) at production sites that have passed inspection.

- Medicinal devices:  Companies can generally sell products such as catheters and scanners in each other's markets without additional inspections.  A joint committee, along with the European Conformity Assessment Bodies and the U.S. Food and Drug Administration, will coordinate details.

- Telecommunications:  The treaty covers virtually all equipment connecting to public telecom networks, such as telephones, modems, and satellite equipment.  The certification of such a product by one party will be recognized by the other.

- Electromagnetic compatibility and electrical safety:  This part of the treaty covers a broad range of products, including computer network equipment and household appliances.  Each party agrees to recognize the reports and certificates issued by another party.

- Recreational craft:  The certification for such products will take place in the exporting country.

The EU and Canada have initialled a similar agreement that covers a trade volume of about $5 billion.  Moreover, the EU has recently initialled MRAs with Australia and New Zealand.  A formal signing of the treaties will take place in a few months.

Citation:  European Union News press release No. 97/41 (June 13, 1997).  [For more information, please call the Commission of the European Communities in Washington D.C. at (202) 862-9500.]

- WTO panel decides EU-U.S. dispute regarding hormone in beef.  On June 30, 1997, a WTO dispute settlement panel issued its final report in the case concerning the EU ban on hormone-treated imported meat.  The U.S. and Canada had brought that case, arguing, among other things, that the EU hormone ban is not based on convincing scientific evidence.  The panel held that the EU ban on six hormones to promote the growth of cattle conflicts with various provisions of the WTO Agreement on Sanitary and Phytosanitary Measures (SPS Agreement) [Editors' Note:  This is the first WTO case involving the SPS Agreement].  The report will become publicly available in August.  The EU is planning to appeal the report.  Citation: European Union News press release, No. 45/97 (July 1, 1997); information received from the U.S. Trade Representative, Press Department, Phone: (202) 395-3000, or (202) 395-3350.

- China establishes Special Committee for Hong Kong's basic law.  On July 1, 1997, China established a Committee for the Basic Law of Hong Kong Special Administrative Region (HKSAR), which will be supervised by China's National People's Congress (NPC).  The 12 members of the Committee, six of whom are from Hong Kong, will advise the NPC concerning HKSAR's legislative power, laws, interpretation of the basic law, and amendments. Citation: Newsletter, Embassy of the People's Republic of China, No. 97-13 (July 7, 1997); also available on the internet at http://www.china-embassy.org

- House Committee Favors Two Bills to Implement Trademark Treaties.  On June 18, 1997, the House Judiciary Committee gave its seal of approval to two bills, HR 567 and HR 1661.  They will implement as domestic law two international treaties on trademarks the U.S. plans to join.  The first is the Madrid Protocol Implementation Act that will allow U.S. trademark applicants to register their trademarks abroad by filing a single international application with the Patent and Trademark Office.  Administration doubts about according voting rights not only to the EU Commission but also to each Member State have thus far held up presidential submission to the Senate but negotiations are going on to resolve the dispute.  The second bill would implement the Trademark Law Treaty.  Since the Treaty is uncontroversial, the President is expected to send it to the Senate within a few weeks.  Its goal is world-wide harmonization and simplification of standards for registration of trademarks.  Citation: 66 U.S.L.W. 2012-13 (1997).  [The source also notes that the full text of both bills is available at http://thomas.loc.gov].

- South Africa assents to Hague Convention on Civil Aspects of International Child Abduction. Though the assent took place by statute in June 1996, the implementing Act will not go into effect until a future date.  Pursuant to Article 6 of the Convention, the statute has selected the Chief Family Advocate as the Central Authority.  He or she may delegate the powers of office to any other duly appointed Family Advocate.  The Minister of Justice has power to make regulations to effectuate the Convention.  Citation: 6/7 Bull. Leg. Dev. 73 (1997).

- EU Commission announces its non-opposition to two notified mergers involving American companies.  The Official Journal of the EU announced that (1) the Commission is not opposed to a merger between Philips and Hewlett-Packard, and (2) it will not oppose a merger between TRW and Magna. Citation: 1997 O.J. of the European Communities (C 110), pages 7 and 9 (9 April 1997).

- Judges of U.N. Law of Sea Tribunal continue their organizational and rule-making activities.  During most of February, 1997, the judges of the International Tribunal for the Law of the Sea held a second series of organizational meetings in Hamburg.  They adopted provisional Rules governing the operations of the Tribunal so that it is now prepared to hear and determine a case if one is submitted to it.  The judges also set up several specialized Chambers.  Pursuant to Part XI of UNCLOS, they formed a Seabed Disputes Chamber consisting of eleven judges and having a distinctive jurisdiction.  The judges also set up a Chamber of Fisheries Matters and a Chamber on the Marine Environment.  Chosen for their expertise, seven judges serve in each Chamber.  At the request of the parties, the Tribunal may also set up an ad hoc chamber to handle particular adjudications.  Citation: 6/7 Bull. Leg. Dev. 84 (1997).