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

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

2000 International Law Update, Volume 6, Number 7 (July).

ARBITRATION

In litigation against London insurer, First Circuit holds that 1856 Massachusetts statute purporting to bar insurance arbitrations did not invalidate clause in international contract that required coverage disputes to be arbitrated in London

In July 1994, the F/V CAPE COD, a commercial fishing vessel, which the Rosalie & Matteo Corporation (RMC) of Gloucester, Massachusetts owned, sank at sea, injuring Francesco DiMercurio, a crew member. When DiMercurio sued RMC in the Massachusetts federal court, however, RMC defaulted. The federal court awarded DiMercurio $350,000 damages in March 1997. RMC then assigned to DiMercurio all rights it had against Sphere Drake Insurance PLC (SDI) of London under its policy with it.

When DiMercurio filed a $350,000 claim with SDI, however, the latter contested it and invoked a clause in the insurance contract that required arbitration in London of all disputes over coverage. At this point, DiMercurio sued SDI in federal court. The court, however, gave summary judgment to SDI, holding that the arbitration clause did not divest the state courts of jurisdiction.

Plaintiff then noted an appeal. He challenged the arbitration clause on two grounds. First, he contended that the clause violated Section 22 of the Massachusetts statutes that voids "any condition, stipulation or agreement [in an insurance policy] depriving the courts of the commonwealth of jurisdiction of actions against [the insurer]." Secondly, plaintiff brands the clause as unconscionable, mainly on grounds of lack of mutuality. The U.S. Court of Appeals for the First Circuit, however, affirms.

The Court first points out that Chapter Two of the Federal Arbitration Act (FAA), 9 U.S.C. Sections 201-208 governs the validity of this arbitration clause. The FAA, in turn, implemented the U. N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21 U.S.T. 2517, T.I.A.S. No. 6997. Since the clause meets Convention requirements, the issue is whether it is "null and void, inoperative or incapable of being performed" under Art. II, Sec. 3.

In plaintiff's view, this arbitration clause does oust the state courts of jurisdiction by taking the dispute out of the commonwealth courts. Nor does the FAA trump section 22 because the McCarran-Ferguson Act, 15 U.S.C. Section 1012(b) expressly precludes state laws regulating insurance from being preempted by federal statute.

The Circuit Court then laments the frequent lack of precision in the use of the term "jurisdiction" by the court rulings on which plaintiff relied. The text and legislative history of the FAA, however, shows that Congress grasped the underlying distinctions in the courts' powers.

"Further evidence that Congress views the courts as retaining ultimate authority over a case despite the referral to arbitration is the provision in Chapter Two of the FAA allowing a party to seek an order confirming the arbitrator's award. See id. Section 207. DiMercurio complains that drawing a line between a court's jurisdiction over a case and its authority to hear a case creates a distinction without a difference. We disagree. It is neither illogical nor meaningless for a court's jurisdiction to remain intact and crucial to the overall arbitration scheme even while it honors the parties' voluntary agreement to deal with the merits outside the courtroom. It is his concept of on‑again, off‑again, on‑again jurisdiction ‑‑ since a court must have subject‑matter jurisdiction both to refer to arbitration and to confirm an arbitration award ‑‑ that strikes us as illogical." [77]

The Court then examines the intended effect of Section 22 that dates back to 1856. In this era, the courts generally followed the English common law resistance to having their jurisdiction "ousted" by arbitration agreements among private parties. Nevertheless, by the middle of the twentieth century, Massachusetts had modified its unfriendly attitude toward arbitration agreements.

As a local treatise summarizes it: "[i]t was not until 1960 when Massachusetts adopted the Uniform Arbitration Act for Commercial Disputes that the old 'ouster of jurisdiction doctrine,' at least as it applied to arbitration, was finally put to rest. Section 1 of the new Chapter 251 of the General Laws leaves little doubt of the Legislature's intent.... Since the enactment of the Uniform Act, our courts have given faithful adherence to its broad purposes and today construe arbitration clauses as broadly as the parties to the agreement in question intend." 19 Massachusetts Practice Evidence Section 102.6, at 45‑46 (2d ed. 1998). [80]

Finally, the Court rejects plaintiff's unconscionability point. While clause 53 of the policy demands the arbitration of all coverage disputes in London, clause 28.1 allows the company to sue in any court of competent jurisdiction for unpaid premiums "or other sum of whatsoever nature due from the Assured."

"We adhere to our view that one‑sided agreements to arbitrate are not favored. (Cit.) In this instance, however, both parties are required to arbitrate coverage disputes. The fact that the company may proceed in court to recover premiums or like fees‑‑a proceeding that is likely to be much more confined than a coverage dispute‑‑does not render the contract impermissibly unbalanced. Moreover, there is no evidence of undue power or deception on the part of the insurer in the negotiation of the policy." [81]

Citation: DiMercurio v. Sphere Drake Insurance, PLC, 202 F.3d 71 (1st Cir. 2000).

BUSINESS ETHICS

OECD adopts revised guidelines for "responsible business conduct" by Multinational Enterprises which recommend standards as to labor, environment, human rights and corruption issues

On June 27, 2000, the Organization for Economic Development, Co-Operation and Development (OECD) adopted the OECD Guidelines for Multinational Enterprises, revising the guidelines first published in 1976 and last revised in 1991. They form part of the OECD Declaration on International Investment and Multinational Enterprises.

The Guidelines are non-binding recommendations to multinational enterprises (MNEs) made by the 33 governments that adhere to them (29 OECD Member countries and 4 non-Member countries), including the U.S.

The goal is to help MNEs operate in harmony with government policies and societal expectations. They provide guidance on appropriate business conduct across the full range of MNE activities.

Governments, businesses, labor unions and NGOs worked together to draw up the Guidelines and approved them during the OECD's annual Council meeting at the ministerial level in Paris. Some broad behavioral standards include (1) Contributing to economic, social and environmental progress, (2) abstaining from any improper involvement in local political activities, (3) disclosing information regarding their activities, structure, financial situation and performance, (4) employing and training local employees, (5) establishing a system of environmental management, (6) combating bribery, and (7) refraining from anti-competitive practices.

A key element of the new Guidelines are improved implementation procedures. Though the Guidelines apply to businesses, governments are responsible through National Contact Points for promoting the Guidelines, handling inquiries, and assisting in resolving issues.

Citation: OECD press releases of June 27, 2000; U.S. Department of State Press Statement, June 27, 2000. [Text of OECD Guidelines is available on OECD website "www.oecd.org"].

CHOICE OF LAW

In litigation by Nicaraguan seaman against U.S. vessel owners for injuries suffered during shrimp harvesting in Nicaraguan territorial waters, Fifth Circuit rejects district court's weighing of Lauritzen-Rhoditis factors and holds that "stationary" nature of operations requires different weighing of choice-of-law elements

Unrelated accidents injured ten Nicaraguan seaman while they were working on the shrimp-harvesting vessels of the U.S. defendants (jointly "Gulf King") in Nicaraguan territorial waters. The seaman filed an action under the Jones Act [46 U.S.C. Section 688] and the general maritime laws of the U.S.

The defendants filed a consolidated motion for summary judgment, arguing that Nicaraguan law governed the claims. Although the district court denied this motion, it did certify the choice-of-law question for consolidated interlocutory appeal.

The U.S. Court of Appeals for the Fifth Circuit reverses. The Court notes that the vessels were licensed by the Nicaraguan government, and the seamen were managed from Nicaragua. The vessels were not subject to the U.S. Coast Guard safety requirements. The U.S. defendants, however, operate the vessels with loans from the Small Business Administration and the U.S. Department of Commerce.

The question of whether the Jones Act and the general maritime law of the U.S. apply or Nicaraguan law applies to these maritime injury claims hinges on the Supreme Court trilogy of cases Lauritzen v. Larsen, 345 U.S. 571 (1953), Romero v. Int'l Terminal Operating Co., 358 U.S. 354 (1959), and Hellenic Lines Ltd. v. Rhoditis, 398 U.S. 306 (1970). In these cases, the Supreme Court had articulated eight non-exhaustive factors for such choice of law questions: (1) the place of the wrongful act, (2) the law of the flag, (3) the allegiance or domicile of the injured, (4) the allegiance of the defendant shipowner, (5) the place of the contract, (6) the inaccessibility of the foreign forum, (7) the law of the forum, and (8) the shipowner's base of operations ("Lauritzen-Rhoditis factors").

The district court had relied mostly on the fact that the vessels flew the American flag. The Court notes that the Supreme Court developed these "Lauritzen-Rhoditis factors" in the context of maritime commerce on the high seas. This case, however, resembles those cases where accidents occurred on drilling platforms. Therefore, the courts should weigh the factors differently.

"We conclude that the facts of this case are more analogous to an injury occurring on a fixed drilling platform than on a vessel in traditional maritime commerce. For that reason, we find that the district court erred in the weight it accorded to the Lauritzen-Rhoditis factors in this case. When we discount the law of the flag and allegiance of the defendants factors which favor application of United States law, and accord more weight to the Plaintiffs' citizenship and residence, the place of the employment contracts and the place of injury, all of which were in Nicaragua, it is clear that the calculus ultimately dictates application of Nicaraguan law. We note, further, that the district court's assumption that the application of United States law would allow the Plaintiffs a more generous recovery, while almost certainly correct, was not a valid consideration in its choice-of-law analysis. 'The fact that the law of another forum may be more or less favorable to a plaintiff, however, does not determine choice of law.' ..." [Slip op. 11-12]

Citation: Solano v. Gulf King 55, Inc., 212 F.3d 902 (5th Cir. 2000).

CRIMINAL JURISDICTION

Florida Supreme Court upholds validity of state statute that purports to allow state to prosecute for crimes by U.S. citizen allegedly committed aboard Liberian cruise ship operating out of Florida port when about 100 nautical miles from shore

Brevard County, Florida authorities charged Matthew Stepansky, a U.S. citizen, with burglary and attempted sexual battery of a thirteen-year-old American citizen aboard the cruise ship M/V ATLANTIC about 100 nautical miles off Florida's Atlantic coast. The ship had left and come back to Port Canaveral in Brevard County. Neither defendant nor victim resides in Florida. Premier Cruise Lines, Ltd. of the British West Indies owns the M/V ATLANTIC but has it registered in Liberia. Neither the federal government, nor any American state nor Liberia has taken any steps to prosecute this offense.

Section 910.006(3), Florida Statutes (1995), provides in relevant part that "The special maritime criminal jurisdiction of the state extends to acts or omissions on board a ship outside of the state under any of the following circumstances: ... (d) The act or omission occurs during a voyage on which over half of the revenue passengers on board the ship originally embarked and plan to finally disembark in this state, without regard to intermediate stopovers." The cruise in question qualified under the statutory terms of Section (d).

Defendant moved to dismiss the charges, arguing that the Supremacy Clause of the U.S. Constitution precluded Florida prosecution for this offense on the high seas. The trial court denied his motion but the intermediate appellate court issued a writ of prohibition on the grounds that Section (d) of the above statute is unconstitutional under Article I, Section 10. On the state's appeal, the Florida Supreme Court reverses in a 5 to 2 vote.

Noting the provisions of the Tenth Amendment and the primary authority of the states to prosecute criminal offenses unless preempted by federal law, the Court analyzes several U.S. Constitutional provisions that might affect the validity of Section (d). Under Article I, Section 8, Clause 10, Congress may define piracies and other felonies on the high seas. The Court, however, rules that principles of concurrent jurisdiction do not preclude prosecution for high seas offenses by both the federal and state authorities.

Defendant's next contention is that Article I, Section 10, Clause 1, bars a state from entering into a treaty with the flag state, Liberia. As a result, the flag-state rule of ordinarily exclusive jurisdiction on the high seas set forth in Article VI of the Geneva Convention on the High Seas of 1958 [13 U.S.T. 2313, 2315, 450 U.N.T.S. 82,86] does not allow for state prosecution for crimes allegedly committed on a Liberian vessel.

"However, as Stepansky conceded during oral argument, criminal defendants lack standing to raise a violation of an international treaty that is not self‑executing. (Cit.) Article 6 of the Geneva Convention on the High Seas is not a self‑executing treaty and does not operate to limit the jurisdiction traditionally asserted by the United States over foreign vessels on the high seas. (Cit.) Therefore, the question of whether section 910.006(3)(d) is in violation of this treaty is not properly before this Court." [Slip op. 3]

Moreover, the Court declares, the exercise of criminal jurisdiction over defendant does not amount to an attempt by Florida to enter into a treaty. In addition, international law does not concern itself as to a state's allocation of jurisdiction within its internal constitutional order. "Whether a State may exercise jurisdiction that the United States is entitled to exercise under international law is, therefore, generally a question only of United States law. Subject to constitutional limitations, a State may exercise jurisdiction on the basis of territoriality, including effects within the territory, and, in some respects at least, on the basis of citizenship, residence, or domicile in the State." Section 402 Comment k, Restatement (Third) of the Foreign Relations Law of the United States (1986).

Nor does defendant's reliance on federal power over admiralty and maritime matters persuade the Court. He concedes that the federal government could prosecute this matter under 18 U.S.C. Section 7(8) which extends federal maritime jurisdiction to federal offenses committed by or against U.S. nationals on board foreign vessels scheduled to depart from or arrive in the U.S. Nothing suggests, however, that this grant is exclusive. In fact, 18 U.S.C. Section 3231 specifically declares that "[n]othing in this title shall be held to take away or impair the jurisdiction of the courts of the several States under the laws thereof."

In the Court's view, the Florida legislature had carefully drafted the statute in question to avoid fueling the arguments that defendant has raised. "We conclude that the structure of section 910.006 ensures that it will not violate the constitution, that it will not conflict with the exercise of jurisdiction by federal courts, and that it will not interfere with the uniform working of the maritime legal system. (Cit.) Section 910.006 provides that the State is not authorized to prosecute a crime under this statute unless federal law 'prohibit[s] substantially the same act or omission.' Section 910.006(4). Further, pursuant to section 910.006(4), 'No person shall be tried under this section if that person has been tried in good faith for substantially the same act or omission.' Similarly, section 910.006(5)(a)1 specifies that 'This section is not intended to assert priority over or otherwise interfere with the exercise of criminal jurisdiction by the United States, the flag state, or the state in whose territory an act or omission occurs.'" [Slip op. 6]

Finally, the extraterritorial aspects of Section (d) fall within the police powers of Florida under the "effects" test. In the preamble, the Florida legislature "asserts that if the federal government and the foreign government under whose flag the cruise ship sails fail to prosecute crimes on cruise ships, Florida's tourism industry will suffer a significant adverse effect." [Slip op. 8]

Citation: State v. Stepansky, No. SC 93106, 25 Fla.L. Weekly S 297, 2000 WL 422872 (Sup. Ct. Fla. April 20, 2000).

EXECUTIVE AGREEMENTS

Canadian Supreme Court upholds validity of British Columbia legislation allowing its securities regulators to compel production of documents and testimony in that province pursuant to Memorandum of Understanding with U.S. Securities and Exchange Commission

In 1988, the British Columbia Securities Commission (BCSC) along with the Provinces of Ontario and Quebec, signed a Memorandum of Understanding with the Securities Exchange Commission of the United States (SEC). Each party contracted to furnish the "fullest mutual assistance" to the other, such as obtaining documents and taking testimony when the other signatory requests it.

At about the same time, British Columbia implemented the MOU by amending its Securities Act, inter alia, with the addition of Section 141(1)(b). This Section authorizes the BCSC's executive director to order a registered securities dealer in the Province to produce records "to assist in the administration of the securities laws of another jurisdiction."

The BCSC issued an order under Section 141(1)(b) against Global Securities Corporation, a B.C. securities broker (GSC), to carry out a request from the SEC. The latter was looking into possible violations of U.S. law by GSC and/or its employees. This investigation focused on one Tracy‑Anne Godoy, who was at the time a GSC employee. The order requested all records relating to Ms. Godoy, as well as all records generally relating to the registrant's trading activities in the United States.

GSC turned over only that part of the ordered material that dealt with Ms. Godoy. The BCSC then served GSC with a hearing notice under Section 161(1) of the Act to find out whether it was in the public interest to compel GSC to fully comply with the production order.

GSC next went to the British Columbia Supreme Court and asked for a declaration that Section 141(1)(b) was ultra vires the province. That Court dismissed the petition as without merit. In a split decision, the Court of Appeal reversed the dismissal. Upon review, the Supreme Court of Canada allows the appeal, ruling that Section 141(1)(b) of the Securities Act is intra vires the province.

As a general proposition of Canadian federalism, the Court explains, provincial legislation is constitutional if its "pith and substance" or dominant characteristic falls within the constitutional powers of the enacting legislature. The effects of the legislation (other than incidental ones) may have probative value on the pith and substance issue. Both sides had submitted evidence by affidavit on the true object and purpose of Section 141 and the trial court acted properly in taking them into account.

The controlling purpose of Section 141(1)(b) is to advance the enforcement of the British Columbia securities laws. It does this in two respects. First, BCSC will often need to access records located outside the Province, the most effective means being with the aid of the securities regulator at the situs of the documents. To motivate cooperation by other provinces and countries, the BCSC has to be able to reciprocate. Section 141(1)(b) gives it the necessary authority to respond to foreign requests.

"The securities market has been an international one for years. However, the Internet has greatly increased the ability of securities traders to extend across borders: [T]he very qualities that make the Internet a valuable tool for investors and the securities industry may render it a convenient tool to perpetrate securities fraud and other violations. The Internet also provides for instantaneous cross‑border communication and interactivity, which challenge traditional notions of jurisdiction and territoriality. (Cit.) In order to regulate effectively this electronic trading, regulators must equally be able to respond, and surmount borders where legally possible." [Slip op. 24]

In the second place, the BCSC will be better able to assess the fitness of British Columbia registrants in many instances by finding out whether there has been improper conduct outside the Province. It is true that Section 141(1)(b) does implicate relations with foreign regulators, it does not purport to have any extraterritorial effect.

GSC had argued that other international arrangements provide a better alternative to Section 141. The Court disagrees. "Without directly questioning the general need for securities regulators to share information, the respondent claims this goal can be achieved in other ways, in particular through the federal Mutual Legal Assistance in Criminal Matters Act, R.S.C., 1985, c. 30 (4th Supp.). However, this treaty‑based method of sharing information is insufficient in the securities context for two reasons. First, it applies only to criminal investigations, and thus would be of no assistance for preliminary, informal investigations of the kind common among securities regulators. Second, MOUs 'are specifically tailored to the needs of each securities regulatory agency. Therefore, they tend to be more efficient and effective than treaties' (Cits.) By contrast, the Mutual Legal Assistance in Criminal Matters Act provides for a relative inter‑agency administrative cooperation pursuant to MOUs." [Slip op. 24-25]

Canadian courts have long recognized that the effective regulation of the domestic securities industry is a recognized power of the provinces. Moreover, the investigation of potential breaches of foreign securities laws comes within the BCSC's power under Section 92(13) to regulate the British Columbia securities market. As such, the "ancillary doctrine" justifies the amended Act on the grounds that Section 141(1)(b) is "necessarily incidental" to the Securities Act.

Citation: Global Securities Corporation v. British Columbia (Securities Commission), File No. 26887, 2000 S.C.C. 21 (Sup. Ct. Can. April 13, 2000).

FORUM NON CONVENIENS

Although Brussels Convention as implemented by statute does not bar English courts from staying its proceedings in favor of New Jersey litigation, English Court of Appeal declines to do so in dispute over recombinant DNA patents based on jurisdiction clause and wider scope of relief sought in U.K.

Eli Lilly & Co. is an Indiana corporation that makes and distributes human growth hormone (hGH) produced through recombinant DNA technology. Novo Nordisk is a company incorporated in the Kingdom of Denmark that manufactures and markets pharmaceutical products.

Beginning in December 1983, Novo Nordisk filed several international and national patent applications having to do with the synthesis of hGH and other proteins using a process called "enzyme cleavage." Nordisk received European Patent No. '814 in May 1990 dealing with protein hGH and the enzyme DAP-1. Later there were applications and patents in several countries including the U.S. A dispute arose between Lilly and Nordisk that centered on certain continuations. Thus, continuation '783 depended on continuation '230, continuation '856 depended on continuation '602. The latter significantly extended to proteins other than hHG but was limited to an enzyme cleavage by DAP-1.

In June 1993, Lilly and Nordisk entered into a license (split into two for tax reasons). A dispute then focused on the U.S. segment of the 1993 license. In the substantive provisions of this U.S. license (exhibit 1), Nordisk granted Lilly a non-exclusive right in the U.S. to make, use or sell the product covered by the U.S. continuation application '783 filed in September 1990 which at the time was abandoned.

Clause 14.1 of Exhibit 1 included the following provision. "This Agreement shall be construed in accordance with English law. In the event of any controversy or claim arising out of or in relation to or in connection with any provision of this Agreement, including breach hereof, the parties hereto shall try to settle the problem amicably between themselves. Should the parties hereto fail to agree, the matter in dispute may be finally settled by arbitration in London, in accordance with the arbitration rules of the International Chamber of Commerce, unless otherwise can be agreed to by the parties. In the event that the parties hereto cannot agree to final settlement by arbitration, the dispute shall be referred to the courts of London, England."

Nordisk and associated companies sued Lilly in a New Jersey federal court in October 1997, alleging infringement of three of its five U.S. patents, in particular '602 relating to hGH. Lilly admitted marketing a product known as "Humatrope" but denied patent infringement and affirmatively claimed a license under the patent in suit. The following year, Lilly obtained a writ in England aimed at the rectification of the license having to do with Nordisk's U.S. patent rights as raised in the New Jersey proceeding. The writ would substitute a reference to '856 for the allusion to '783 in exhibit 1.

In the English proceeding, Nordisk moved in September 1998 to set aside service of the writ for want of jurisdiction and to stay all further proceedings. It argued (1) that by submitting its defense and counterclaim in the New Jersey proceedings, Lilly had waived or varied its rights under Section 14.1 of exhibit 1; (2) that in relation to the English proceedings, the New Jersey proceedings raised the same issues and thus were lis alibi pendens and (3) that New Jersey was the more appropriate forum.

The Chancery Division of the High Court denied these requests. Nordisk sought review in the Court of Appeal. That Court, however, dismisses the appeal.

The Court of Appeal first addresses the question of whether the English courts have the power to stay their proceedings because a U.S. forum is more convenient in which to litigate. Under the Brussels Convention on Jurisdiction and Judgments as implemented in English law by the Civil Jurisdiction and Judgments Act of 1982, Member State courts lack such power inter se, thus leaving no room for the English and American doctrines of forum non conveniens in the EU context.

On the other hand, the Court notes that the parties to the Brussels Convention intended to regulate mandatory jurisdiction only as between the Member States of the EU. In this case one party is domiciled in a Member State and the other is not. Thus, in the Court's view, it would not clash with the Convention for an English court to decide pursuant to Section 49 of the 1982 Act that the New Jersey courts are the more appropriate forum in which to resolve the parties' dispute.

The second point raised by Nordisk questions whether the claims made by Lilly in England are the same as those it has raised defensively in New Jersey. In the Court's view, they are not. The New Jersey proceeding seeks to enforce a contract as written. In the English case, however, the contention is that the contract means what it says but that it fails to embody the true agreement between the parties and that the court should rectify or alter the contract to reflect that agreement. The Court also notes that the New Jersey license defense put out by Lilly will admittedly not succeed unless Lilly persuades the English court to grant the rectification requested. This does not mean that the claims are the same, however, but only that victory in one claim is a necessary condition to success in the other.

On a third point, the lack of claim identity means that the defense and counterclaim in the New Jersey proceeding amounts neither to  lis alibi pendens nor to a waiver or variation in Section 14.1 of exhibit 1. Another practical consideration is that the English trial date would be almost one year earlier than the New Jersey date. All of these factors make Section 14.1 central to applying the doctrine of Spiliada Maritime Corporation v Cansulex [1987] AC 460, [1986] 3 All ER 843.

Section 14.1 requires the application of English law but the New Jersey court might characterize the provision as "procedural" and apply American law. Moreover, the rectification issue is confined to Lilly in the English courts but the New Jersey litigation also involves other issues of validity and infringement between Nordisk, Lilly and other parties to the proceeding. Nordisk also points to its offer to submit to judgment in the English proceedings, thus arguably leaving nothing to litigate in England. The Court grants this offer no effect since it seemingly does not cover all the relief that Lilly seeks in England.

Citation: Eli Lilly and Company v. Novo Nordisk A/S, [2000] Int. Lit. Proc. 73 (Eng. Ct. App.)(Transcript: Smith Bernal).

INTERNET

Japan issues law approving electronic signatures and certification services, reflecting efforts underway in U.S. and EU to provide legal effect to such transmissions

The Japanese Ministry of Trade and Industry (MITI) has published a preliminary English translation of the new Law Concerning Electronic Signatures and Certification Services of May 24, 2000. The purpose of the law is to promote the diffusion of information by electronic means. It introduces a presumption that proper electronic signatures are authentic(Chapter 2, Article 3). It also provides for accreditation of "designated certification services" that confirm the authenticity of electronic signatures (Chapter 3).

A foreign certification service may also become accredited in Japan. As to accredited foreign certification services, the presence of a treaty or mutual recognition agreement in force between Japan and the other nation will simplify the process. The effective date of the law was April 1, 2001.

[Editors Note: For Japan, the acceptance of electronic signatures is a big step towards e-commerce and electronic document transmission. Traditionally, Japanese have relied on seals with the family name engraved in Chinese characters, called "hanko," to ensure the authenticity of important documents.]

In a related matter, on June 30, 2000, U.S. President Bill Clinton signed into law the Electronic Signatures in Global and National Commerce Act [Pub. L. 106-229], which will give electronic signatures, such as fingerprint scans and encryption keys, the same legal force as ink-and-paper signatures.

The EU as well has prepared a framework Directive on electronic commerce that contains provisions for the validity of electronic contracts. The European Parliament approved the Electronic Commerce Directive on May 4, 2000, and it appeared in the Official Journal at 2000 O.J. of the European Communities (L 178) 1, 17 July 2000. [The August issue of International Law Update will contain a detailed report about this new Directive].

Citation: Law Concerning Electronic Signatures and Certification Services of May 24, 2000. [Preliminary English translation of Japanese law is available on MITI website "www.miti.go.jp"].

JURISDICTION

In litigation over 1959 expropriation of Cuban oil concessions, Eleventh Circuit interprets federal long-arm provision, upholding dismissal of claims against Canadian corporations for lack of personal jurisdiction and providing guidance on quantity and quality of U.S. contacts needed for general personal jurisdiction

The former Cuban subsidiaries of Consolidated Development Corporation and Consolidated Cuban Oil & Gas Rights Corporation (hereinafter "Consolidated") held oil concessions in the Republic of Cuba which that government expropriated in 1959. Consolidated filed this action for damages in 1996 against the Cuban State, four Cuban corporations, and two Canadian corporations and their affiliates.

The district court dismissed the claims against the Canadian corporations and their affiliates ("the Canadian defendants") for failure to state a claim upon which relief may be granted. Consolidated appealed. The U.S. Court of Appeals for the Eleventh Circuit affirms the dismissal but on jurisdictional grounds.

Consolidated's amended complaint relied on Fed.R.Civ.P. 4(k)(2), the national long-arm provision, as the basis for personal jurisdiction over the Canadian defendants. In cases — such as this one — where a defendant is not subject to the jurisdiction of the courts of general jurisdiction of any one state, Rule 4(k)(2) permits a court to aggregate a foreign defendant's nationwide contacts to allow for service of process, as long as (1) plaintiff's claims "arise under federal law," and (2) the exercise of jurisdiction is "consistent with the Constitution and laws of the United States." Here, the Court focuses on the first prong.

"Specific jurisdiction" arises out of a nonresident party's purposeful activities in the forum that relate to the cause of action alleged in the complaint. "General personal jurisdiction" arises from a defendant's substantial contacts with the forum that are unrelated to the cause of action being litigated. The due process requirements for general personal jurisdiction are more stringent than for specific personal jurisdiction, and require a showing of continuous and systematic general business contacts between the defendant and the forum state.

Here, Consolidated's allegations in the complaint do not arise out of any contacts the Canadian defendants have with the United States. The cause of action involves properties in Cuba which the Cuban government had seized and which the Canadian defendants had allegedly developed. Therefore, any exercise of jurisdiction must be under the higher "general jurisdiction" standard, thus requiring a review of whether the defendants have had continuous and systematic general business contacts with the U.S. so as to subject them to the jurisdiction of U.S. courts.

The Canadian defendants have had only minor contacts with the U.S. In 1993-94, one of the Canadian companies had issued bonds and debentures in the U.S. through an agent, and one of its subsidiaries has been marketing fertilizers and chemicals in the U.S.

The Court emphasizes that a non-resident corporation's contacts with the forum that are unrelated to the litigation must be substantial in order to warrant the exercise of personal jurisdiction under Rule 4(k)(2). For example, neither meetings in the forum state to sign boilerplate contracts, or the placing of advertisements in local newspapers supply the necessary general nexus. Here, the Court finds that offering bonds and debentures in the U.S. several years before the filing of the current action does not amount to the sort of systematic business contacts required for general personal jurisdiction. The Court also rejects Consolidated's argument that merely having a registered agent is enough for general personal jurisdiction.

Finally, the Court rejects Consolidated's argument that one of the defendant companies is amenable to service under Rule 4(k)(2) because its subsidiary markets products in the U.S. "It is well established that as long as a parent and a subsidiary are separate and distinct corporate entities, the presence of one in a forum state may not be attributed to the other. ... Generally, a foreign parent corporation is not subject to the jurisdiction of a forum state merely because a subsidiary is doing business there. Where the 'subsidiary's presence in the state is primarily for the purpose of carrying on its own business and the subsidiary has preserved some semblance of independence from the parent, jurisdiction over the parent may not be acquired on the basis of the local activities of the subsidiary.'" [Slip op. 19-20]

The remaining Canadian defendants have had virtually no contacts with the U.S. The Court, therefore, concludes that the district court lacked personal jurisdiction over Consolidated's claims against all of the Canadian defendants.

Citation: Consolidated Development Corp. v. Sherritt, Inc., Nos. 97-5726 & 97-5953, 2000 WL 889749 (11th Cir. July 5, 2000).

SERVICE OF PROCESS

Pending ratification of service Convention by EU Member States, EU issues regulation on the inter-Member service of judicial documents in civil or commercial matters

On May 26, 1997, the EU Council issued a Convention on the service in the Member States of the European Union of judicial and extrajudicial documents in civil or commercial matters. That Convention has not yet entered into force. While that Convention is pending, the Council has issued Regulation 1348/2000 that essentially makes the Convention's provisions directly applicable to the EU Member States. [Editors' Note: In the EU, a "regulation" is directly applicable to all Member States without need of national implementation].

In part, the Regulation (1) requires each Member State to designate "transmitting agencies" for the transmission of such documents to be served in another Member State (Article 2, paragraph 1), (2) exempts all submitted documents and papers from legalization or any equivalent formality (Article 4, para 4), (3) provides that the receiving agency shall serve the document according to the law of the receiving country, or in the particular form requested by the transmitting agency unless such a method is incompatible with the law of the receiving Member State (Article 7, paragraph 1), (4) allows the receiving agency to refuse to accept the document if it is not in one of the official languages of the place where service is to take place or in a language of the Member State of transmission that the addressee understands (Article 8, paragraph 1), (5) permits, in exceptional circumstances, Member States to use consular or diplomatic channels to forward judicial documents to the designated agencies in other Member States (Articles 12 & 13), (6) authorizes Member States to allow mail service of judicial documents directly to persons residing in other Member States (Article 14).

The Regulation prevails over any other bilateral or multilateral agreement, including the Brussels Convention of 27 September 1968, and the Hague Convention of 15 November 1965 in relations among the EU Member States party thereto (see Preamble, paragraph 12 and Article 20). The Member States, however, may arrange to expedite or simplify the transmission of documents, as long as those methods comply with the Regulation.

The Annexes specify the necessary information, such as transmitting agency identity and method of service, for a request for service of documents. They also provide samples of the following documents: acknowledgments of receipt, returns of requests and documents, notices of retransmission, receipts by the appropriate receiving agency, and certificates of service or non-service of documents. Denmark has opted out of this Regulation. The effective date of the Regulation was May 31, 2001.

Citation: Council Regulation (EC) No 1348/2000 of May 29,2000 on service in Member States of judicial and extrajudicial documents in civil or commercial matters, 2000 O.J. of the European Communities (L 160) 37, 30 June 2000.

TAXATION

In case where petitioners residing in U.S. received special commissions from Israeli company apparently as compensation for services, U.S. Tax Court declines to treat sums as "foreign source income" for purposes of calculating foreign tax credit

The petitioners in this case are ten individuals and one Connecticut corporation founded by David Deitsch in 1960. The individuals belong to the Deitsch family. Petitioners own the company which manufactures laminated materials for the production of upholstery. Petitioners had been receiving two sorts of payments from an Israeli corporation. First, there were payments made directly to petitioners on which they paid taxes to the Israeli Government. The second type involved payments made to a partnership and reported by certain petitioners as their distributive shares of partnership income.

In 1974, David Deitsch established a company in Israel to manufacture flocked fabrics for the production of drapery and upholstery, called Flocktex Industries, Ltd., also owned by the petitioners. Beginning in 1987, Flocktex began making substantial payments to "Flocktex shareholders," in some instances as much as $2.35 million. Through withholding, the recipients paid income taxes to the State of Israel which certified the payments as "commission fees." Flocktex itself classified the payments as "selling expenses" paid as "special commissions."

The individual petitioners reported the special commissions on their U.S. income tax returns as "other income," not as dividends on Schedule B. They claimed foreign tax credits on their U.S. tax returns for the Israeli taxes that Flocktex had paid. The Internal Revenue Service disagreed.

In this Tax Court action, the petitioners argued that U.S. tax law characterized both special commissions paid by Flocktex as dividend income from a foreign source. In their view, the Israeli labels for reporting purposes were not conclusive. Furthermore, petitioners argued that dividend treatment was appropriate because the recipients rendered no services and because the large size of the payments made it unreasonable to view them as compensation.

On the other hand, the IRS asserted that petitioners' characterizations impermissibly sought to reduce U.S. income taxes through improper claiming of foreign tax credits and assigning of income among entities. In its view, the special commissions represented compensation for services performed in the U.S.

The U.S. Tax Court concludes that the payments to the petitioners were not foreign source income for purposes of calculating the credit for foreign taxes. Payment of taxes to a foreign government may give rise to either a deduction under I.R.C. Section 164(a)(3) or a credit under Section 901. Payment for services rendered outside the U.S. and dividends from foreign corporations typically constitute foreign source income for purposes of calculating the Section 901 credit.

The Court notes that the petitioners told Israeli authorities that the special commissions were compensation for management and consulting services. Therefore, the Court holds "that the petitioners are bound by the various representations that these payments constituted commission or consulting income, rather than dividends. Further, since the record is devoid of any evidence that the recipients were residing or working outside the United States during the years at issue, we decide that the sums must be treated as compensation for services performed in the United States and, hence, as U.S. source income. Petitioners are not entitled to treat the special commissions as foreign source income for purposes of calculating foreign tax credits." [Slip op. 44]

The Tax Court holds that payments made directly to petitioners are to be characterized as compensation for services performed within the U.S. not as foreign source income for purposes of calculating the credit for foreign taxes under I.R.C. Section 901.

Furthermore, petitioners should not have reported payments to the partnership as partnership income nor did they amount to income to the corporate petitioner. Like the remittances above, U.S. law treats these payments as compensation for services earned by the individual petitioners. Except for the two petitioners who resided in Israel, they are U.S. source income to the individual petitioners. Therefore, the petitioners are not entitled to a deduction for foreign taxes paid under I.R.C. Section 164 in lieu of the disallowed foreign tax credits.

Citation: Pinson v. Commissioner of Internal Revenue, No. 7561-98 (U.S. Tax Court, July 6, 2000).

U.S. and China sign agreement for mutual assistance in criminal matters. On June 19, 2000, the U.S. and China concluded an Agreement on Mutual Legal Assistance in Criminal Matters in Beijing. Chinese Assistant Foreign Minister, Zhang Yesui, and Eugene Martin, U.S. Charge d'Affaires to China signed the Agreement. The event occurred during the visit to China of Barry R. McCaffrey, the director of the Office of National Drug Control Policy. Aimed in particular at drug related crimes, the Agreement includes provisions on mutual assistance for the service of documents, investigation and taking of evidence, and seizing assets. Citation: Newsletter, Embassy of People's Republic of China, No. 00-12, June 30, 2000; [See also Washington Post, June 20, 2000, page A17.]

Iran-U.S. Claims Tribunal rules on U.S. compliance with Algiers Declarations. In the 1970s and 1980s, the Iranian government brought a number of American lawsuits to recover assets that Iran claimed that the former Shah of Iran and his family had stolen. Paragraphs 12-14 of the Algiers Declaration requires the U.S. government to freeze any assets of Pahlavi family members served as defendant in a civil action by Iran, demands that all persons in the U.S. report any knowledge they have about such assets, dictates that the U.S. government inform the courts that sovereign immunity or the act of state doctrine do not apply and ensures the enforcement of Iranian judgments in such cases pursuant to U.S. law. After the U.S. courts dismissed all of these suits, Iran went to the Iran-U.S. Claims Tribunal at the Hague contending that the U.S. has repeatedly failed to live up to its duties. In a 5 to 4 vote, the Tribunal handed down its ruling on April 7, 2000. As to the New York state action against the Shah himself (during which he had passed away) no estate was ever collected so that the U.S.'s duty to freeze never arose. The result differs as to the American lawsuits against the Shah's wife and three sisters. After Iran had process served on these defendants, the U.S. allegedly declined to look into and freeze their assets unless the validity of service was uncontestable. The Claims Tribunal sees this as contravening the Declarations. The Tribunal, however, rejects Iranian claims that the courts' dismissal of several suits on forum non conveniens grounds created a breach of duty by the U.S. Nor did the American courts' refusal to enforce several Iranian default judgments against one of the sisters as lacking in due process involve a U.S. violation of the Declarations. Citation: 4 Mealey's Int'l Arb. Rep. 19 (April 2000).

EU again modifies list of Yugoslav institutions subject to sanctions. The European Union (EU) has again modified its list of institutions registered in Yugoslavia that may be subject to EU sanctions. The list includes the names of major companies, such as BASF and Mercedes-Benz, that have affiliated businesses in Yugoslavia. Citation: 2000 O.J. of European Communities (L 161) 68, 1 July 2000. [See also previous reports in 2000 International Law Update 98].

EU-Mexico Free Trade Agreement enters into force. On July 1, 2000, the Free Trade Agreement (FTA) between Europe and Mexico officially entered into force. The parties had signed the Agreement at the March Meeting of the European Council in Lisbon. Its goal is to dismantle tariffs between the two parties, thus allowing preferential access for exporters into their respective markets, and to open public procurement. The FTA will liberalize more than 96% of the trade between the two parties by the year 2007 at the latest. The FTA contains tariff elimination schedules for both parties, Rules of Origin, Non-tariff measures, Government Procurement provisions, Competition rules, and Dispute Settlement procedures. Citation: European Union News Releases No. 35/00 (July 5, 2000). [Full text of FTA is available on website "http://europa.eu.int/comm/trade/bilateral/mexico/fta.htm"].

EU bars merger between MCI WorldCom and Sprint. The European Commission has prohibited the proposed merger between the U.S. telecommunication firms MCI WorldCom Inc., and Sprint Corp, because it would have given the new company a dominant position in the market for universal internet connectivity. Even though the companies proposed to divest Sprint's internet business, the Commission had competition concerns. — The Commission had requested comments regarding the proposed merger on June 23, 2000, and had begun a second-phase investigation of the matter (see 2000 O.J. (C 143) 4). — Pursuant to the 1991 EU-U.S. Agreement on Antitrust Cooperation, the Commission examined the proposed merger together with the U.S. Justice Department. — On July 13, 2000, WorldCom Inc. and Sprint Corp. officially canceled their $129 billion merger plan because opposition from the EU and the U.S. Department of Justice. — Also on July 13, 2000, U.S. Assistant Attorney General Joel I. Klein issued a statement welcoming the decision of WorldCom and Sprint to abandon their merger plans. Citation: European Union News Releases No. 34/00 (June 28, 2000). [See also Financial Times (London), June 29, 2000, page 36.]; The Washington Post, July 14, 2000, page E1 (Cancellation of merger); U.S. Department of Justice press release 00-397 (July 13, 2000).