10 Legal Forces International Business by Ball, McCulloch, Frantz, Geringer, and Minor McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved. This chapter covers: Legal forces that confront international business The importance of foreign law International contracts Protection of intellectual property Purposes of taxes Enforcement of antitrust laws Product liability

Chapter Objectives  Appreciate the complexity of the legal forces that confront international business  Recognize the importance of foreign law  Understand contract devices and institutions that assist in interpreting international contracts  Anticipate the need and methods to protect your intellectual properties  Understand that many taxes have purposes other than to raise revenue  Discuss enforcement of antitrust laws  Appreciate the risk of product liability legal actions  Discuss U.S. laws that affect international business operations 10-2

International Legal Forces Rule of law allows foreign businesses to know interests will be protected Public International Law Legal relations between governments Private International Law Laws governing transactions of individuals and companies 10-3

Sources of International Law The most important source is found in bilateral and multilateral treaties between nations. Treaties are agreements between countries and also may be called conventions, covenants, compacts, or protocols United Nation’s International Court of Justice creates law when it decides disputes U.S. Congress determines whether treaties have precedence over other federal laws and treaties International rules derived from customs and usage 10-4

Extraterritoriality The attempt to enforce domestic laws outside of a country’s borders Practiced by many countries including the U.S. and EU Not done through force, but by traditional legal means 10-5

International Dispute Settlement  Litigation in the United States  The U.S. has well-developed court systems that facilitate litigation.  These court systems handle both criminal and civil matters.  One reason many people outside the U.S. dislike litigation in the U.S. is the process of discovery.  Unlike most other countries, the U.S. has two major court systems.  The federal court system and the system of state courts. 10-6

Issues Surrounding Performance of Contracts A major problem usually involved in cross-border litigation is The question of which jurisdiction’s law should apply and in which location the litigation should occur. Each country has laws to determine this Final decision rests with the courts 10-7 United Nations Solutions Many countries, including the U.S., have ratified the UN Convention on Contracts for International Sales of Goods (CISG) CISG established uniform legal rules to govern international sales contracts CISG is automatically applied

Issues Surrounding Performance of Contracts Private Solutions, Arbitration Instead of going to court in any country, companies may opt for arbitration. Quicker Less expensive More private Many cases handled in Paris, London and NY 10-8

Enforcement of Foreign Arbitration Awards The UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards The U.S. and most UN member-countries of industrial importance have ratified this convention Binds ratifying countries to compel arbitration when the parties have so agreed in their contract and to enforce the resulting awards 10-9

Intellectual Property  Intellectual property includes  Patents  Trademarks  Trade names  Copyrights  Trade secrets  All result from the exercise of someone’s intellect. Each country protects in their own fashion 10-10

Intellectual Property  Patents (Protection)  International Convention for the Protection of Industrial Property  European Patent Organization  The World Intellectual Property Organization  Trademarks  Protection varies from country to country which may be from 10 to 20 years.  Madrid Agreement of 1891  General American Convention for Trademark and Commercial Protection.  European Trademark Office

Intellectual Property  Trade Names  Trade names are protected in all countries that adhere to the Convention for the Protection of Industrial Property  Copyrights Protection is provided under the Berne Convention of 1886 adhered to by 77 countries Universal Copyright Convention of 1954 adopted by 92 countries 10-12

Common Law or Civil Law  Common Law  Courts made common law as they decided individual cases  Judges in a common law jurisdiction have the power to interpret the law  Civil Law  Civil law was made by king, princes, or legislatures issuing decrees or passing bills  Judges in a civil law jurisdiction have the power only to apply the law

Differences between the U.S. and England  England has a split legal profession with barristers and solicitors  No jury for civil court actions  No contingency fee in court cases  The losing party in England must pay most of the court costs of the winning party  In England, parties generally are entitled to receive a list of witnesses with a brief explanation of the expected testimony

Standardizing Laws Many attempts have been made to standardize laws among various nations International business flows much better with a uniform set of rules Attempts include Tax conventions and treaties Antitrust cooperation International Center for Settlement of Investment Disputes UN Convention on International Sale of Goods International Organization for Standardization (ISO) International Electrotechnical Commission (IEC) 10-15

Taxation Nonrevenue tax purposes Redistribute income Discourage consumption of certain products Encourage the purchase of domestic rather than imported products To discourage investment abroad To achieve equality of taxes paid 10-16

National Differences of Approach Tax Levels Range from relatively high in some Western European countries to zero in tax havens Some countries have capital gains taxes, and some do not A capital gain is realized when an asset is sold for an amount greater than its cost Tax Types Capital gains tax Income tax Common in industrialized countries Value-added tax Tax based on the value of goods and services Used in Europe WTO permits rebate on VAT Unitary tax

Tax Laws and Regulations From country to country, the complexity of tax systems differ Many consider tax laws and regulations of the U.S. the most complex Compliance with tax laws and their enforcement vary widely Germany and U.S. strict, Italy and Spain relatively lax Other differences include Tax incentives, exemptions, costs, depreciation allowances, foreign tax credits, timing, and double corporate taxation 10-18

Taxation  Tax Treaties or Conventions  Differences between nations’ tax practices have resulted in many signing tax treaties with each other.  The presence or absence of a tax treaty is often a factor in international business and investment location decisions.  The U.S. has tax treaties with over 50 countries

Taxation Ecommerce and the ease of shifting operations and residences is making it easier to avoid taxes U.S. applies National Tax Jurisdiction, taxing citizens regardless of where they live and work Almost all other countries apply Territorial Tax Jurisdiction which exempts citizens who neither work nor live in the country 10-20

Antitrust Laws Antitrust laws are intended to prevent monopolies The U.S. antitrust laws are strict vigorously enforced The EU is becoming more active in the antitrust field Differences between U.S. and other nations’ antitrust laws include the per se concept and the application of both civil and criminal penalties The U.S. and the EU have attempted to enforce their antitrust laws extraterritorially Japan’s Fair Trade Commission has been nicknamed the “toothless tiger”, but the Japanese companies are incorporating antitrust thinking into their strategies 10-21

Tariffs, Quotas, and Other Trade Obstacles  Purposes of tariffs  To raise revenue for the government  To protect domestic producers  Quotas limit the number or amount of imports  For protection  U.S. can impose retaliatory barriers  Other protection obstacles include  Health requirements  Packaging requirements  Language requirements Weak patent or trademark protection Quarantine periods Voluntary Restraint Agreements

Product Liability  Product Liability  Holding a company and its officers and directors liable and possibly subject to fines or imprisonment when their product causes death, injury, or damage  Strict Liability  Holds the designer/manufacturer liable for damages caused by a product without the need for a plaintiff to prove negligence in the product’s design or manufacture 10-23

Product Liability Differences in U.S. law No restrictions on amount of money damages that can be awarded Rigid enforcement of strict liability, no need to prove negligence U.S. lawyers take cases on a contingency fee basis Outside the U.S., when a defendant wins, the plaintiff must pay all court costs U.S. Product liability cases are heard by juries Discovery available in U.S

Currency Exchange Controls  Exchange Control Generalities  In countries where hard foreign currency is scarce, a government agency allocates it.  People entering such a country must declare how much currency of any kind there are bringing in and also how much they are taking out.  The intent is twofold  To discourage travelers from bringing in the host country’s national currency brought abroad at a better exchange rate  To encourage travelers to bring in hard foreign currency 10-25

U.S. Laws That Affect U.S. Firms International Business Federal Employment Laws Title VII of the CRA of 1964 ADEA and ADA Foreign Corrupt Practices Act (FCPA) Questionable or dubious payments by American companies to foreign officials revealed in 1970’s Congress passed FCPA outlawing bribery, but not “grease” payments Accounting Law – Sarbanes-Oxley Act Established reporting requirements 10-26

Current International Court of Justice President Shi Jiuyong (China) Shi Jiuyong Vice-President Raymond Ranjeva (Madagascar) Raymond Ranjeva Judges Gilbert Guillaume (France) Gilbert Guillaume Abdul G. Koroma (Sierra Leone) Abdul G. Koroma Vladlen S. Vereshchetin (Russian Federation) Vladlen S. Vereshchetin Rosalyn Higgins (United Kingdom) Rosalyn Higgins Gonzalo Parra-Aranguren (Venezuela) Gonzalo Parra-Aranguren Pieter H. Kooijmans (Netherlands) Pieter H. Kooijmans Francisco Rezek (Brazil) Francisco Rezek Awn Shawkat Al- Khasawneh (Jordan) Awn Shawkat Al- Khasawneh Thomas Buergenthal (United States of America) Thomas Buergenthal Nabil Elaraby (Egypt) Nabil Elaraby Hisashi Owada (Japan) Hisashi Owada Bruno Simma (Germany) Bruno Simma Peter Tomka (Slovakia ) Peter Tomka

KEY EVENTS IN A MULTILATERAL TREATY 10-28

Facts and figures on International Court of Arbitration in Requests for Arbitration were filed with the ICC Court; those Requests concerned 1,584 parties from 123 different countries and independent territories; in 11% of cases at least one of the parties was a state, parastatal or public entity; the place of arbitration was located in 47 different countries throughout the world; arbitrators of 69 different nationalities were appointed or confirmed under the ICC Rules; the amount in dispute exceeded one million US dollars in 55,3% of new cases; 369 awards were rendered 10-29

International Standards Organization 10-30

President Lyndon B. Johnson signs the Civil Rights Act of 1964, July 2,