Legal Analyses written by Mike Meier,
Attorney at Law. Copyright 2017 Mike Meier. www.internationallawinfo.com.
1999 International Law
Update, Volume 5, Number 2 (February).
COMPETITION (MERGER)
Court of Justice of
European Communities annuls E.C. decision conditionally clearing major merger
in potash industry; gives weight to "failing company" defense from
U.S. law
In December 1999, the
European Commission issued a decision pursuant to the controversial Merger
Regulation 4064/89. It conditionally approved a proposed merger between two large
German producers of potash mainly for agricultural uses, K+S (a subsidiary of
BASF) and MdK. The Treuhandanstalt (Treuhand), a governmental organization,
owned MdK. Treuhand was engaged in restructuring various formerly state-owned
undertakings in the old German Democratic Republic.
The Commission reasoned
that there were two geographical markets for potash, the German market and the
Community market in the other 14 Member States. The merger would bring about a
de facto monopoly in the German market but, in its view, the merger would not
have caused it.
Under a "failing
company defense," MdK would in any event have gone out of business and
K+S would have taken over its market share. Thus, the merger would not have
substantially affected the market within Article 2(2) of the Regulation.
In the other 14 Member
States, the Commission decided that the merged entity would acquire a
dominant sixty-percent market position along with a large French potash
producer, SCPA, a subsidiary of EMC, a publicly-owned French corporation. An
important factor in this result was that SCPA and K+S had long enjoyed close
commercial bonds. These ties included a Canadian production joint venture,
co-operation in an export cartel and SCPA's furnishing of most of K+S's supplies
in France. Moreover, the Commission found that their competitors were too
splintered to make inroads on their joint market share.
The Commission, however,
imposed the following conditions on its approval of the merger. First, K+S
and K+S/MdK had to get out of the export cartel, including its agency contract
with it. Second, they had to stop distributing through SCPA and then set up
their own separate shipping network in France. Finally, though not a formal
obligation, K+S should commit itself to trying to arrange with SCPA to market
the output of the Canadian joint venture independently within the EC.
France brought an Article
173 proceeding asking the Court of Justice to annul the decision entirely. SCPA
and its parent, EMC, filed a separate proceeding that sought partial annulment
of that segment of the decision that required breaking up the export cartel and
the independent marketing of output. In their view, nullifying only the
conditions would merely leave the clearance in an unconditional state.
In reply, the Commission
insisted that the appeal by SCPA and ECM was inadmissible on three grounds.
First, they had no standing to seek partial annulment of the decision. Second,
the decision having been addressed to K+S/MdK, they were neither directly nor
individually concerned as required by Article 173. Finally, there was no
binding decision on the issue of independent marketing.
The Court of Justice of the
European Communities annuls the Commission's decision in its entirety. On the
standing issues, the Court finds that the decision directly concerned both SCPA
and ECM in that it demanded the break-up of the export cartel and the cutting
of the distribution nexus with K+S in France. On the other hand, the
independent marketing commitment did not directly affect them. Thus the their
appeal was admissible except on this issue.
Next, the Court concludes
that the Commission had properly treated the fourteen other Member States of
the Community as a geographical market separate from Germany itself. The
factors supporting this distinction include the amount of cross-border potash
trade, the interchangeability of the types of potash turned out in various
manufacturing locations, the homogeneity of prices throughout the States in
question and the lack of barriers to entry.
The Court then examines the
American-style "failing company defense" as to the German market. It
finds that the Commission was on sound ground in concluding that the merger as
such did not substantially impair the weakening competitive structure of that
market.
The Court also agrees that
the Merger Regulation did cover collective dominant positions. On the other
hand, the Court concludes that the Commission had mistakenly found that the
combination of the K+S/MdK (23%) and SCPA (37%) market shares would, in and of
itself, set up a dominant position in the relevant market.
For one thing, the
Commission had put too much weight on the links between K+S, and SCPA and the
export cartel plus French distribution and had treated these elements as the
centerpiece of its decision. In addition, the Commission had failed to
establish the unlikelihood of an effective competitive response to the
grouping.
Finally, the Court notes
that Article 10(5) of the Merger Regulation does allow for partial annulments
of severable parts of Commission decisions. In this case, however, the decision
was indivisible. The Court could not annul the conditions for clearing the
merger without changing the essence of the decision.
Citation: France
v. E.C. Commission, Cases C‑68/94 & C‑30/95, [1998] 4 C.M.L.R. 829 (Ct.
Just. Eur. Com.).
COMPETITION (PRICE FIXING)
German High Court holds
that car rental company's dictation of lease rates to branches and franchisees
violated German competition law against price fixing
Sixt AG, a Car Rental
company headquartered in Pullach, near Munich, has only a few franchise
partners. [Sixt is Germany's largest car rental and used car sales business. Of
Sixt's 360 car rentals outlets, franchisees run only 13. It uses a company-wide
booking and reservation system, and advertises the (uniform) lease rates of its
affiliated businesses.]
At some point, Sixt began
to "recommend" that its branch offices and franchisees use the uniform
lease rates advertised by Sixt as the franchisor. The franchisees and other
affiliated business also had to grant discounts to large customers that Sixt
had negotiated.
The district court
(Landgericht) and the State Supreme Court (Oberlandesgericht) in Munich had
found Sixt's practice of imposing mandatory lease rates anti-competitive. The
German Anti-Trust Agency (Bundeskartellamt) had also considered Sixt's
mandatory lease rates improper mandatory pricing.
Essentially affirming the
lower courts in an important application of the German ban on price fixing
(Verbot der Preisbindung), the Antitrust Division (BGH-Kartellsenat) of the
German High Court (Bundesgerichtshof, BGH) held on February 2, 1999 that the
prohibition also applies to franchisor-franchisee relationships.
Though Sixt tried to
characterize its policy on lease rates as "recommended," the Court
found that Sixt was imposing a de facto mandatory pricing scheme. Noting that
free competition in a market economy demands free and flexible pricing, the Court
described Sixt's scheme as a "circumvention of the prohibition against
fixed pricing in violation of antitrust laws."
The bar against mandatory
pricing extends to franchisees who carry the economic risk of market
participation and this decision affirms the autonomy of franchisees. As the
Court put it, they may make business decisions as "companies that are
being supported," not as "entrepreneurs who are held quiet or being
degraded to employee status."
Citation:
The press release about the BGH decision is available on the website
www.uni-karlsruhe.de/~bgh; Article "Autovermieter Sixt darf Partnern keine
Mietwagenpreise diktieren" in Sueddeutsche Zeitung, February 3, 1999.
[Marcus Ehrhart, Attorney at Law in Munich, Germany kindly forwarded these materials.]
ENVIRONMENTAL LAW
U.S. President issues
executive order to prevent entry into U.S. of "Invasive Species" of
flora and fauna
On February 3, 1999,
President Clinton issued Executive Order 13112 to control the introduction of
"Invasive Species" and to limit their economic, ecological and human
health impact. The Executive Order mandates federal agencies to bar the
introduction of such species.
The Order also establishes
an "Invasive Species Council," including the Secretary of State and
the EPA Administrator, to make sure that government officials carry out this
Order. The Council is to prepare an Invasive Species Management Plan within 18
months.
Environmentalists consider
exotic species a significant threat to domestic species and ecosystems. They
can spread diseases or simply crowd out the native species. For example, in the
Chesapeake Bay region, 160 species are probably or definitely non-native. In
the Great Lakes, the non-native Zebra mussel filters water so effectively that
it might create a food shortage for fish.
Citation:
Executive Order 13112 of February 3, 1999, 64 Federal Register 6183 (February
8, 1999). [The Chesapeake Bay Newspaper, Bay Journal, June 1998 (see
www.bayjournal.com), reported on the plans to address the issue of
"invasive alien species."]
HUMAN RIGHTS
Where U.K. servicemen
exposed to atomic and hydrogen bomb tests in South Pacific claimed that U.K.
Ministry of Defense failed to produce medical records needed to support their
pension claims, European Court of Human Rights found no violations of Articles
6 or 8 of the Convention for applicants' failure to exploit pension tribunal's
procedure for obtaining government documents
During August and September
of 1958, applicant Kenneth McGinley was serving in the U.K. armed forces as a
plant operator on Christmas Island in the South Pacific. He was among some
20,000 British servicemen in the area of certain nuclear test explosions
carried out by the U.K.
Applicant Edward Egan was a
stoker on a government vessel located about 60 miles from one of the test
explosions. McGinley was about 25 miles away during five detonations. Several
of the explosions were in the megaton range.
During each explosion, the
government had the applicants take part in line-ups in the open air. They were
to face away from the detonation with their eyes closed. Since there was no personal
monitoring of radiation levels, both men were unable to find out whether these
levels had been high enough to imperil their health.
On January 14, 1966, the
U.K. assumed obligations under the European Convention on Human Rights.
During the 1970s and 1980s,
applicants found themselves before the Pensions Appeal Tribunal (PAT). They
each sought an increase in their pensions, claiming that their military service
during the nuclear testing in 1958 had caused them long-term health problems.
The Ministry of Defense (MOD) had asserted that the Christmas Island explosions
had not exposed the applicants to harmful levels of radiation. Applicants'
burden was to produce reliable evidence that raised a reasonable doubt as to
whether the MOD's statement was correct.
In an attempt to meet this
burden, applicants asked the government to produce two kinds of documents
during the PAT proceedings. First, they sought those parts of their military
medical records showing that they had suffered from, and that the military had
treated them for, radiation‑related conditions beginning soon after the test
detonations. Secondly, they requested any other military records from which the
PAT could evaluate the extent of their personal exposure to radiation.
As the documents were not
forthcoming, applicants were unable to create a reasonable doubt as to
radiation damage to their health. The PAT then rejected their claims.
Applicants applied to the
European Commission on Human Rights at Strasbourg. After reviewing their
cases, the Commission certified to the Court issues of fair procedure under
Article 6(1) and failure to respect individual and family rights under Article
8 of the European Convention. Differing majorities on the Court, however, rule
against applicants on both grounds.
As to the nonproduction of
medical records of radiation treatment, applicants failed to convince a
majority of the Strasbourg Court that the military had kept such records or, if
they had, that they were in existence in 1966 when the U.K. had undertaken obligations
under the Convention. The absence of personal monitoring at the time of the
testing also persuaded the Court that claims as to the existence of radiation
exposure records were little more than speculative.
Moreover, assuming the
existence of material records, PAT Rule 6 did allow applicants to have PAT
request their disclosure from the British government. The Court accepts the
assurances of that government that it would have honored a general request from
the PAT and there would have been no basis for raising security objections
under Rule 6(2)(b). Applicants did not, however, invoke Rule 6 at any time. In
a 6 to 3 vote, therefore, the Court finds that no violation of Article 6(1)
took place.
Applicants secondly alleged
that the U.K. government had interfered with their right to respect for their
private or family lives guaranteed by Article 8 of the Convention. A 5 to 4
majority of the Court sees no merit in this argument.
The Court generally notes
that Article 8 imposes both negative and positive obligations upon the state.
Not only does Article 8 strive to shield the individual and his family against
arbitrary interference by public authorities but there may also be inherent
positive obligations. In exploring the latter, the Court has to strike a fair
balance between general community interests and the competing interests of
individuals.
Due to the known health
hazards of exposure to high levels of radiation, applicants' uncertainty as to
the risks they had undergone may well have caused them great and long-time
anxiety and distress. Since the radiation level records might have reassured
them on this point, they had an Article 8 interest in gaining access to them.
Nevertheless, applicants had expressly disclaimed any desire to get hold of these
documents through PAT procedures.
The Government represented
that there was no national security reason to resist disclosure of information
as to the radiation levels in the Christmas Island region after the tests. The
lack of governmental interest combine with applicants' interests in obtaining
that information to create a positive obligation under Article 8. When a
government takes part in hazardous activities that might have hidden adverse
effects on the health of those taking part, respect for private and family life
requires that there be an effective and accessible procedure for affected
individuals to seek relevant information.
The U.K. had in fact
provided this procedure in PAT Rule 6. Since neither applicant chose to make
use of the PAT procedures under Rule 6 or to obtain the radiation level records
at any prior time, a close majority of the Court concludes that the U.K. did
not violate applicants' rights under Article 8.
Citation:
McGinley and Egan v. United Kingdom, Eur. Ct. Hum. Rts., 27 E.H.R.R. 1 (1999).
INTERNET
EU adopts Action Plan to
combat illegal and harmful internet contents such as child pornography and hate
speech
The European Parliament and
the EU Council have issued a four-year EU Action Plan (1999-2002) "on
promoting safer use of the Internet by combating illegal and harmful content on
global networks." Among the specific actions are (see Article 3 and Annex
I):
- Promoting industry
self-regulation and content-monitoring schemes
(for example against child pornography and hate speech). It includes a
European network of centers ("hot-lines") where users may report
illegal internet content.
- Encouraging industry to
provide filtering tools and rating systems. The EU will develop a Code of
Conduct, as well as "quality site" labels.
- Increasing internet
awareness among users through workshops, school teachers, and other promotion.
The total budget to carry
out the Action Plan is EUR 25 million (Article 1). The Commission is the
implementing authority aided by a committee of Member State representatives
(Articles 4&5). Legal entities in third countries and international organizations
may also take part in the Action Plan (Article 7).
Citation:
Decision No 276/1999/EC ..., 1999 O.J. of the European Communities (L 33) 1, 6
February 1999.
JUDICIAL ASSISTANCE
Second Circuit holds that
it cannot obtain domestic evidence under 28 U.S.C. § 1782 for use in private
commercial arbitration in Mexico conducted under ICC auspices because it is
not a "proceeding in a foreign or international tribunal"
National Broadcasting Co.
and NBC Europe (jointly NBC) agreed to provide a Mexican television
broadcasting company, TV Azteca, with programming and other services. The
agreement also allowed NBC to buy up to 10% of Azteca's shares. The parties
agreed to make use of private commercial arbitration to resolve their contract
disputes. Mexican substantive law would control and procedures would follow
the rules of the International Chamber of Commerce (ICC), a private
organization based in Paris, France.
After it tried to buy only
1% of Azteca's shares, NBC found itself as the respondent in a Mexican
arbitration initiated by Azteca. Before the appointment of the arbitration
panel, NBC sought to obtain testimony from Azteca's U.S. investment bankers and
advisors regarding Azteca's plans for an initial public offering of
securities (IPO), including
Merrill Lynch and Salomon Brothers.
It applied ex parte under
28 U.S.C. § 1782 to a New York district court to serve document subpoenas on
those financial institutions. [Under 28 U.S.C. § 1782(a), a district court may
order a person to give testimony or turn over documents for use in a foreign
or international tribunal].
When Azteca and the
financial institutions moved to quash the subpoenas, the district court granted
the motion. It held that 28 U.S.C. § 1782 does not apply to private commercial
arbitration under the auspices of non-governmental organizations. The U.S.
Court of Appeals for the Second Circuit agrees with the district court and
affirms.
Though commercial
arbitration arises out of contract, NBC argued that federal courts may
nevertheless subpoena third parties under § 1782. Azteca and the financial
institutions maintained, however, that the Federal Arbitration Act (FAA) [9
U.S.C. § 1], that gives federal courts a role in arbitration, provides the
exclusive means for obtaining evidence from nonparties in private arbitration
proceedings.
The FAA applies to private
commercial arbitration in the U.S., as well as to arbitrations in certain
foreign countries that are parties to the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards ("New York Convention") [7
I.L.M. 1046, implemented at 9 U.S.C. §§ 201-08], and the Inter-American
Convention on International Commercial Arbitration (IAC) [14 I.L.M. 336,
implemented at 9 U.S.C. §§ 301-07].
FAA § 7 permits federal
courts to assist arbitrators in obtaining evidence, including the enforcement
of subpoenas. The language of § 7, however, is narrower than § 1782 in that the
former grants arbitrators -- but not the parties -- the authority to subpoena
witnesses or documents. Furthermore, § 7 confers enforcement authority only
upon district courts where the arbitrators are sitting. Finally, § 7 refers
only to testimony and other evidence before the arbitrators. It is not clear
whether § 7 permits the court to compel pre-hearing depositions and pre-hearing
discovery, especially from non-parties.
Section 1782 does not
define "foreign or international tribunal." The legislative history, however, shows that
congress intended § 1782 to authorize judicial assistance to governmental or intergovernmental
arbitral tribunals, conventional courts, and other state-sponsored adjudicatory
bodies, but not private tribunals.
"The popularity of
arbitration rests in considerable part on its asserted efficiency and
cost-effectiveness characteristics said to be at odds with full-scale
litigation in the courts ...Few, if any, non-American tribunals of any kin,
including arbitration panels created by private parties, provide for the kind
of discovery that is commonplace in our federal courts and in most, if not
all, state courts. ... The limitations in § 7 of the FAA ... are consistent
with these traditional discovery limits, which would be overridden by the
application of § 1782 to proceedings before private arbitral panels. Opening
the door to the type of discovery sought by NBC in this case likely would
undermine one of the significant advantages of arbitration, and thus arguably
conflict with the strong federal policy favoring arbitration as an alternative
means of dispute resolution. ..."
"Furthermore, such
broad discovery in proceedings before 'foreign or international' private
arbitrators would stand in stark contrast to the limited evidence gathering
provided in 9 U.S.C. § 7 for proceedings before domestic arbitration panels.
Such an inconsistency not only would be devoid of principle, but would also
create an entirely new category of disputes concerning the appointment of
arbitrators and the characterization of arbitral panels as domestic, foreign,
or international." [Slip Op. 21-22]
Citation:
Nat'l Broadcasting Co., Inc. v. Bear Stearns & Co., Inc., No. 98-7468 (2d
Cir., January 26, 1999).
TAXATION
In case of U.S. bank
claiming foreign tax credit for taxes withheld by Brazilian Central Bank based
on Ministerial private letter ruling, D.C. Circuit holds that "Act of
State" doctrine requires IRS to accept Brazilian tax as legally binding
During the 1980s, Riggs
Bank made loans to the Central Bank of Brazil as part of the effort to save
Brazil from a debt crisis. Those loans were so-called "net loans" --
the borrower (the Central Bank) had to pay interest and any local (Brazilian)
taxes that the lender (Riggs Bank) owes on that interest income. Thus, the
borrower bore the risk of a change in Brazilian tax rates.
In the later reckoning of
U.S. tax liability, the lender must include in its gross income the interest
payment received from the borrower and the Brazilian tax paid (on the lender's
behalf) to the Brazilian government. [Interestingly, the Internal Revenue Code
allows a taxpayer to take the tax paid abroad as a foreign tax credit against
U.S. tax liability].
The Brazilian Supreme Court
had ruled in 1996 that the tax immunity of an entity such as the Central Bank
may also shield the interest income of a foreigner making a net loan. The
Brazilian Revenue Service issued a ruling to the same effect.
Riggs and other banks
therefore requested a different private letter ruling from the Brazilian
Minister of Finance, which they in fact received. [Brazil does not use the
common law rule of stare decisis so that courts can readily modify their
previous decisions.]
The private letter ruling
distinguished the contrary precedent, and stated that one could "look
through" the loan transaction to those private borrowers who would
ultimately receive net loans from the Central Bank and pay taxes on the
interest. The Central Bank must withhold
such taxes from the future borrowers.
Riggs Bank claimed that it
had paid taxes to the Brazilian government on the interest income from the net
loans it had made to the Brazilian Central Bank. Riggs Bank therefore claimed
foreign tax credits under § 901 of the Internal Revenue Code. The Internal
Revenue Service (IRS) considered the Central Bank tax-exempt as a governmental
entity. It thus disallowed the credits because Riggs was not "legally
liable" for the tax under Brazilian law.
The Tax Court denied Riggs'
petition for relief. The U.S. Court of Appeals for the D.C. Circuit, however, reverses.
Riggs argued that the IRS'
and the Tax Court's refusal to accept the private letter ruling of the
Brazilian Minister of Finance ran afoul of the "Act of State"
Doctrine. This Doctrine directs U.S. courts to abstain from deciding cases
whose outcome turns upon the legality or illegality of a foreign sovereign's
act within its own territory.
The Doctrine usually
applies to "tangible" acts. The question here is whether an
interpretation of law can be an Act of State.
"[W]hether or not it
can be said that the Brazilian Minister of Finance's interpretation of Brazilian
law qualifies as an act of state, the Minister's order to the Central Bank to
withhold and pay the income tax on the interest paid to the Bank goes beyond a
mere interpretation of law. ... Such an order has been treated as an act of
state. ... The Tax Court's conclusion on Brazilian law -- that no tax is
imposed on a net loan transaction involving a governmental entity as borrower
-- implicitly declared 'non-compulsory,' i.e., invalid, the Minister's order to
the Central Bank to pay the taxes. The act of state doctrine requires courts
to abstain from even engaging in such an inquiry." [Slip Op. 16-17]
Contrary to the IRS'
arguments, this ruling will not jeopardize the IRS' ability to determine
foreign tax credits. Generally, the IRS accepts the foreign country's laws and
requirements and determines their U.S. tax consequences by U.S. law, not
foreign law. In this case, the IRS had in fact focused on the foreign law.
The Court understands that
this situation troubles the IRS because Riggs received a foreign tax credit at
the U.S. Treasury's expense. Furthermore, the actions of the Brazilian Government
are disturbing because it created a tax specifically for Riggs and other banks
making loans to the Central Bank, resulting in beneficial foreign tax credits
for the banks. The IRS, however, has not yet created a legitimate remedy
against such use of foreign tax credits.
Citation:
Riggs Nat'l Corp & Subsidiaries v. Commissioner of Internal Revenue
Service, No. 98-1039 (D.C. Cir. January 12, 1999).
TRADE
WTO issues report in
anti-dumping duty dispute between U.S. and Korea over Dynamic Random Access
Memory Semiconductors (DRAMS)
A Panel of the World Trade
Organization (WTO) has issued its Report
in the U.S.-Korea dispute over Dynamic Random Access Memory Semiconductors
(DRAMs). The Report was circulated on January 29, 1999.
In 1993, based on an
anti-dumping duty petition submitted by Micron Technologies, Inc., the U.S.
Department of Commerce had imposed an anti-dumping duty on such DRAMs from
Korea. In a 1997 review, called Final Results Third Review, the Department of
Commerce found that two of the affected Korean companies, Hyundai and LG
Semicon, had not dumped their DRAMs during the review period. The Department of
Commerce, however, did not revoke the anti-dumping duty (see 62 Federal
Register 39809, July 24, 1997).
Shortly thereafter, Korea
had asked the WTO to make the U.S. (1) revoke the anti-dumping duty order on
Korean DRAMs, (2) alter the de minimis standard for review of anti-dumping duty
orders, and (3) eliminate the "no likelihood/not likely" criterion
for dumping used for review of anti-dumping duty orders (Section
353.25(a)(2)(ii)).
Article 11.2 of the WTO
Anti-Dumping Agreement provides that
"authorities shall review the need for the continued imposition of
the duty ... on their own initiative or ... upon request by an interested party
... Interested parties shall have the right to request the authorities to
examine whether the continued imposition of the duty is necessary to offset
dumping, whether the injury would be likely to continue or recur if the duty
were removed or varied, or both. ..."
Based on this Article, the
Panel opines that a country does not have to immediately revoke an anti-dumping
duty as soon as an exporter has ceased dumping (Paragraph 4.34). The Panel,
however, finds that the Section 325.25(a)(2)(ii) "not likely"
criterion effectively requires the continuation of anti-dumping duties and
prevents revocation (Paragraph 4.51).
The Panel found that
Section 353.25(a)(2)(ii) of the Commerce Regulations, and the 1997 review based
on that Section, are inconsistent with U.S. obligations under Article 11.2 of
the WTO Anti-Dumping Agreement. The Panel, however, declines to suggest ways in
which the U.S. may comply with this decision.
Citation:
United States - Anti-Dumping Duty on Dynamic Random Access Memory Semiconductors
(DRAMs) of one Megabit or Above from Korea (WT/DS99/R), 29 January 1999. [The
Panel Report is available on the WTO website at www.wto.org.]
TRADE
U.S. and EU agree to
compromise banana dispute before WTO
On January 29, 1999, at the
meeting of the WTO Dispute Settlement Body, the U.S. and the EU accepted a
compromise to resolve their dispute over EU restrictions on banana imports. The
compromise essentially followed a proposal by WTO Director-General Renato
Ruggiero.
Several Latin American
banana producers and U.S. banana companies have long complained about the EU
licensing system for banana imports that favor the former colonies and controlled
territories of EU Member States. A WTO Panel had found the EU banana regime
inconsistent with WTO trading rules (see 1997 Int'l Law Update 123). The EU
subsequently issued new regulations on its banana regime (EU Regulations
1637/98 and 2362/98), which in the U.S.' opinion continued the restrictive
trade practices. Two weeks before the compromise, on January 14, 1999, the U.S.
had notified the WTO of its intention to suspend concessions to the EU
affecting trade of about $520 millions, and requested WTO authorization.
On January 25, 1999, the
WTO Director-General proposed that the parties enter immediately into
consultations according to WTO procedures. The U.S. may suspend concessions to
the EU only after an arbitrator has decided their scope.
Citation:
WTO, European Communities -- Regime for the Importation, Sale and Distribution
of Bananas, Recourse by the United States to Article 22.2 of the DSU
(WT/DS27/43), 14 January 1999. [Related materials are available on the WTO
website www.wto.org; The European Union Press
Release No. 3/99 (January 29, 1999); U.S. Trade Representative press
release 99-01 (January 14, 1999)].
TRADE
WTO Appellate Body affirms
U.S. win in U.S.-Korea dispute over latter's high taxes on imported liquors
In September 1998, a WTO
Dispute Settlement Panel found that Korea's taxes on imported liquors violated
WTO trading rules [see 1998 Int'l Law Update 123]. On January 18, 1999, the WTO
Appellate Body essentially affirms that decision.
The U.S. and the EU had
challenged two Korean laws, the Liquor Tax Law and the Education Tax Law.
These statutes lay a tax rate of up to 100% on certain imported liquors while
taxing the traditional Korean liquor soju at only 35%. The initial Panel and
the Appellate Body both found that these taxes violate Article III:2 of GATT
[No special taxes/charges on imported goods].
The Appellate Body upholds
the Panel's interpretation of the terms "directive competitive or
substitutable product" and "so as to afford protection" (see
GATT Article III:2). It recommends, as did the Panel, that Korea make its laws
comply with GATT 1994 obligations.
Citation:
WTO Appellate Body, Korea -- Taxes on Alcoholic Beverages (WT/DS75/AB/R &
WT/DS84/AB/R), 18 January 1999. [The Report is available on the WTO website
www.wto.org.]
TRADE SECRETS
Canadian Supreme Court
declines to authorize injunction in favor of owner of juice trademark against
third-party's use of confidential recipe in marketing new juice blend but
remands for redetermination of compensatory damages
Duffy-Mott (DM) was the
producer of "Clamato," a blend of tomato juice and clam broth. DM
licensed its trademark and its formula for Clamato to Caesar Canning (CC). So
that CC could turn out Clamato, DM passed along confidential information about
its recipes and manufacturing procedures. CC later contracted with FBI Foods
(FBI) to make Clamato and relayed the confidential information to it.
Cadbury Schweppes (CS) next
bought the shares of DM. It then notified CC that it was terminating the
license agreement, and thus the subagreement with FBI, as of April 15, 1983.
Under the license contract, CC (and FBI) could still compete with CS in the
juice market. On the other hand, the contract barred CC from using the
trademark "Clamato." It also precluded CC from making or marketing
any product containing clam and tomato juice for five years.
Leaving out clams or other
seafood, CC borrowed from the list of Clamato ingredients and its processing
methods, and, at the expiration of the license contract, came out with a
product it called "Caesar Cocktail." FBI agreed to co-pack the new
item.
In 1983, CS secretly found
out the precise formula for "Caesar Cocktail." It took no action to
enjoin its manufacture and sale, however, since its attorneys incorrectly
advised it that, without clam broth in the new recipe, they would not have a
sound claim.
Caesar Canning later
declared bankruptcy and FBI bought its assets. The latter went on making Caesar
Cocktail through FBI Brands, a wholly-owned subsidiary. CS got new legal advice
in 1986 and then sent a cease-and-desist letter to FBI Brands.
In 1988, CS sued both FBI
companies. The trial judge found that defendants had wrongfully appropriated
plaintiff's confidential information. This enabled them to secure a 12-month
launching platform into the cutthroat juice market. The judge declined,
however, to issue an injunction. Instead, she awarded so called
"head-start damages."
On the other hand, the
Court of Appeal permanently enjoined defendants from continued use of the
confidential information or any products developed based on it. It also awarded
plaintiff lost profits.
The Canadian Supreme court
allows the appeal and dismisses the cross-appeal. The court generally observes
that equity is a court of conscience. It will impose its remedies against a
third party who has knowingly gotten confidential information in breach of
that confidentiality.
Actions for unauthorized
use or disclosure of confidential data may sound either in contract, tort or
property law. The choice does not limit the court's jurisdiction over such cases
but may bear on the appropriateness of a particular remedy.
The Court also notes that
the policies underlying fiduciary relationships normally do not apply to
business enterprises that deal at arm's length. Commercial context alone,
however, will not negate fiduciary duties if all their elements exist. In the
Court's view, the license agreement in this case is not incompatible with the
duty of confidence that the law imposes. Its breach warrants some compensation
to plaintiff.
Plaintiff's reliance on a
"property" analogy is controversial. A mere breach of confidentiality
should not automatically lead to a proprietary remedy. As the authorities hold,
a case-by-case balance of the equities rather than handy labels should dictate
the choice of remedies. The trial judge was on the right track when she pointed
out that plaintiffs would, in any event, have had to confront a saleable
version of Caesar Cocktail within twelve months.
It is true that equity may
produce more generous compensation than its common law counterpart in tort.
Both regimes, however, would support a remedy that would put plaintiff back
into the financial position it would have enjoyed had it not been for the
breach of confidentiality.
The Court then vacates the
permanent injunction issued by the Court of Appeal. That initially bad legal
advice may have counted against the defense of acquiescence does not prevent it
from influencing the equities of injunctive relief as of the date of trial.
Caesar Cocktail went into
production eleven years before the trial using "nothing very special"
information which, if plaintiff had timely complained, technology could have
replaced. Issuing an injunction in 1999 would economically damage defendants
much beyond what is needed to restore plaintiff to the competitive position it
would have been in sixteen years ago but for the breach. On the other hand, the
trial judge's "consulting fee" approach was not the right measure of
damages here.
The Court modifies the
terms on which the referee should calculate damages. The referee should
evaluate the financial loss during the twelve-month period, if any,
attributable to the breach of confidence. He or she should realize that the
goal is a broadly equitable goal rather than an unattainable mathematical
precision. The Referee may take into account
relevant market factors, as well as the royalties otherwise payable
under the license agreement during the compensable period.
Citation:
FBI Foods Ltd. v. Cadbury Schweppes, File No. 25778 (Canadian Supreme Court
1999).
- EU amends its regulation
on importation of flora and fauna. The EU has amended its
Regulation "No 2473/98 suspending the introduction into the Community of
specimens of certain species of wild fauna and flora." The amending
Regulation No. 250/1999 revises the annexes of protected species such as
homopus signatus from Namibia and Geochelone chilensis from Argentina. Unlike
the U.S. initiative [see above under TRADE], the EU focusses more on the
protection of alien species rather then preventing the interference of those
alien species with domestic species. Citation: EU Regulation No
250/1999, published in 1999 O.J. of European Communities (L 29) 5, 3 February
1999.
- Italy announces income
tax incentives for companies. The Italian Government has proclaimed a tax
reduction from 36% to 19% on company investments made through the year 2001.
The Government presented the tax amendment (Dell ordinamentale fiscale) to the
Senate (acto Senato 3599). The purpose is to encourage foreign companies to
invest in Italy, since it has to compete as a venue with other low-tax EU
countries. The EU has not yet harmonized tax rates. Citation:
Investimenti, un bonus a tutto campo, Il Sole-24 Ore (February 11, 1999), page
19 (summarizes the pending legal changes).
- EU suspends WTO panel
on Massachusetts Myanmar law. According to a Reuters press report, the EU
has suspended the WTO panel that was to
review the Massachusetts law restricting that state's business dealings with
companies that are commercially active in Myanmar (formerly Burma) under the
repressive military regime. In November 1998, a Massachusetts district court
held that the state law impermissibly infringes on the federal government's
power to regulate foreign commerce. (see National Foreign Trade Council v.
Baker, 26 F.Supp.2d 287 (D. Mass. 1998)). Citation: EU suspends WTO
panel probing U.S. state law, Reuters news release, February 8, 1999.
- EU publishes Agreement
with U.S. on Mutual Recognition of technical compliance The EU has published the EU Council's approval
of the Mutual Recognition Agreement with U.S., as well as the text of the
Agreement and information on the effective date [see 1998 Int'l Law Update 134
]. The Agreement entered into force on December 1, 1998. Citation: 1999
O.J. of the European Communities (L 31) 1, 4 February 1999.
- U.S. suspends Title
III lawsuit provision of the Cuban Liberty and Democratic Solidarity Act.
President Clinton has again suspended the lawsuit provision of Title III of the
Cuban Liberty and Democratic Solidarity (LIBERTAD) Act [or the Helms-Burton
Act] for an additional six months. The lawsuit provisions would permit actions
against firms that operate with assets derived from property expropriated by
the Castro regime. The purported reasons are that suspension will accelerate
peaceful political transition in Cuba, and will not interfere with other
nations who are urging Cuba to respect human rights. Citation: U.S. Department
of State Press Statement (January 15, 1999); Reuters report of January 15,
1999.
- EC Commission approves
AT&T's takeover of European telecom companies.
The European Commission has approved AT&T's taking control of Telecommunications,
Inc. (TCI). AT&T has a group of subsidiary companies in the UK while TCI is
a U.S. company focussing on cable television services that control three EU
companies. TCI's shareholders will receive AT&T shares in exchange for
their TCI shares. The Commission has determined that the merger will have only
a marginal effect on competition because of the highly competitive nature of
the EU telecom market. Citation: European Union News press release No.
103/98 (December 7, 1998).
- U.S. joins OECD
convention that aims to fight bribery. On December 8, 1998, the
U.S. deposited its instrument of ratification to become a Contracting Party to
the OECD Convention on Combating Bribery of Foreign Public Officials in
International Business Transactions. So far, all 29 OECD member countries, as
well as five non-member countries, have signed the Convention. It is expected
to enter into force early in 1999. The U.S. also has recently adopted
legislation to make the Convention part of its domestic law [see 1998 Int'l Law
Update 138]. Citation: OECD News Release, December 9, 1998.
- EU extends time for its
participation in nuclear energy cooperation project among EU, U.S., Russia and
Japan. The EU Council has decided to enlarge for three more
years the duration of the Agreement among the European Atomic Energy Community,
the Government of Japan, the Government of the Russian Federation, and the
Government of the United States of America on cooperation in engineering design
activities (EDA) for the international thermonuclear experimental reactor
(ITER). The Council has attached to the decision the text of the amendment to
extend this cooperation, along with the parties' memoranda of understanding.
The U.S. will take part in the project at least until July 22, 1999. Citation:
Commission Decisions 98/704/Euratom & 98/705/Euratom, 1998 O.J. of the
European Communities (L 335) 61 & 66, December 10, 1998.
- U.S. and Mexico sign
mobile satellite agreement. On December 21, 1998, the
U.S. and Mexico signed a "Protocol Concerning the Transmission and
Reception of Signals from Satellites for the Provision of Mobil-Satellite
Services and Associated Feeder Links in the United States of America and the
United Mexican States." It will
expand satellite technologies for providing world-wide mobile satellite services
to consumers in both countries. Citation: U.S. Department of State Press
Statement (December 22, 1998).
