1 International Business Law Lecture 4 The Multinational Enterprise

2 A. HOME STATE REGULATION OF MULTINATIONAL ENTERPRISES Topics Topics Unfair competitionUnfair competition Products liabilityProducts liability Sharp practicesSharp practices

3 Unfair Competition Laws United States Unfair Competition Laws United States Unfair Competition Laws Sherman Antitrust Act of 1890 is the principal US law regulating anti- competitive behavior.Sherman Antitrust Act of 1890 is the principal US law regulating anti- competitive behavior. Section 1 of the Act prohibits contracts, agreements, and conspiracies which restrain interstate or international trade. Section 1 of the Act prohibits contracts, agreements, and conspiracies which restrain interstate or international trade. Section 2 of the Act forbids attempts to monopolize commerce or trade either between the states of the US or in international commerce affecting the US. Section 2 of the Act forbids attempts to monopolize commerce or trade either between the states of the US or in international commerce affecting the US.

4 Unfair Competition Laws Clayton Act of 1914: defines certain specific acts that constitute unfair business competition.Clayton Act of 1914: defines certain specific acts that constitute unfair business competition. Robinson-Patman Act of 1936: makes ____________________ illegal.Robinson-Patman Act of 1936: makes ____________________ illegal.

5 Unfair Competition Laws Enforcement of US Antitrust Laws Enforcement of US Antitrust Laws US Justice Department may bring criminal suits for egregious violations.US Justice Department may bring criminal suits for egregious violations. US Federal Trade Commission may bring civil actions (notably for injunctions) to ensure full compliance.US Federal Trade Commission may bring civil actions (notably for injunctions) to ensure full compliance. Private persons may sue and recover ________________ for injuries they have suffered.Private persons may sue and recover ________________ for injuries they have suffered.

6 Unfair Competition Laws Extraterritorial Application of US Antitrust Laws Extraterritorial Application of US Antitrust Laws Sherman Act applies to conduct affecting “trade or commerce among the several states, or with foreign nations.”Sherman Act applies to conduct affecting “trade or commerce among the several states, or with foreign nations.”

7 Unfair Competition Laws Judicially imposed limits on the extraterritorial application of the US antitrust laws.Judicially imposed limits on the extraterritorial application of the US antitrust laws. Personal Jurisdiction Requirements. Personal Jurisdiction Requirements. Subject Matter Jurisdiction Requirements Subject Matter Jurisdiction Requirements

8 Unfair Competition Laws Personal Jurisdiction RequirementsPersonal Jurisdiction Requirements Due process forbids a court from assuming personal jurisdiction unless a defendant has minimum contacts with the forum state. Due process forbids a court from assuming personal jurisdiction unless a defendant has minimum contacts with the forum state. 1. the defendant ___________ did business in the forum state; and 2. the defendant reasonably could have anticipated that it would have to defend itself in the forum state.

9 Subject matter jurisdiction requirementSubject matter jurisdiction requirement Two tests have been created by the courts for determining when they have subject matter jurisdiction in an American antitrust case: Two tests have been created by the courts for determining when they have subject matter jurisdiction in an American antitrust case: a.Effects test b.Jurisdictional Rule of Reason test Unfair Competition Laws

10 Unfair Competition Laws Effects test: Companies carrying on business outside of the US will come within the subject matter jurisdiction of a US court if their business activity is: Effects test: Companies carrying on business outside of the US will come within the subject matter jurisdiction of a US court if their business activity is: 1.Intended to affect US commerce, and 2.Not _________.

11 Jurisdictional Rule of Reason test: A three-pronged test – Jurisdictional Rule of Reason test: A three-pronged test – 1.Was the alleged conduct intended to affect the foreign commerce of the US? 2.Was it of a type and magnitude that violates the Sherman Act? 3.As a matter of international ________ and fairness, should a court assume extraterritorial jurisdiction? Unfair Competition Laws

12 Unfair Competition Laws In considering comity and fairness, courts balance the following factors:In considering comity and fairness, courts balance the following factors: Degree of conflict between US and foreign law or policy Degree of conflict between US and foreign law or policy Nationality and location of the parties Nationality and location of the parties Which state is better able to obtain compliance Which state is better able to obtain compliance Relative significance of effects on US and other nations Relative significance of effects on US and other nations Whether conduct was intended to harm US commerce Whether conduct was intended to harm US commerce _____________ of effects on commerce of US and other nations _____________ of effects on commerce of US and other nations

13 European Union Unfair Competition Laws European Union Unfair Competition Laws European Union Treaty contains two provisions regulating business competition.European Union Treaty contains two provisions regulating business competition. Article 81 prohibits normal arm’s length competitors from entering into agreements or carrying on concerted practices which either prevent, restrain, or distort trade. Article 81 prohibits normal arm’s length competitors from entering into agreements or carrying on concerted practices which either prevent, restrain, or distort trade. Article 82 forbids businesses with a dominant position in their marketplace from taking improper advantage of their position to the detriment of _____________. Article 82 forbids businesses with a dominant position in their marketplace from taking improper advantage of their position to the detriment of _____________. Unfair Competition Laws

14 A. HOME STATE REGULATION OF MNEs Enforcement: EU Commission is solely responsible for enforcing Articles 81 and 82.Enforcement: EU Commission is solely responsible for enforcing Articles 81 and 82. Extraterritorial application:Extraterritorial application: EU ______________: Articles 81 and 82 apply to a foreign firm to the extent that the firm's activities have an affect on trade or commerce within the EU. EU ______________: Articles 81 and 82 apply to a foreign firm to the extent that the firm's activities have an affect on trade or commerce within the EU.

15 A. HOME STATE REGULATION OF MNEs Opposition to the Extraterritorial Application of Unfair Competition Laws Opposition to the Extraterritorial Application of Unfair Competition Laws Diplomatic protests.Diplomatic protests. Blocking statutes hamper a plaintiff's ability to obtain evidence or enforce a judgment abroad.Blocking statutes hamper a plaintiff's ability to obtain evidence or enforce a judgment abroad. Clawback provisions in these statutes allow defendants to bring suit in their home country to recover ___________ damages paid abroad. Clawback provisions in these statutes allow defendants to bring suit in their home country to recover ___________ damages paid abroad. Anti-suit Injunctions forbid nationals from suing abroad.Anti-suit Injunctions forbid nationals from suing abroad.

16 A. HOME STATE REGULATION OF MNEs Product Liability Laws Product Liability Laws Rationale: Manufacturers must assume liability for the injuries their products cause.Rationale: Manufacturers must assume liability for the injuries their products cause. Product Liability Theories:Product Liability Theories: Breach of contract. Breach of contract. Negligence. Negligence. Strict liability. Strict liability.

17 A. HOME STATE REGULATION OF MNEs Extraterritorial Application of Product Liability LawsExtraterritorial Application of Product Liability Laws Country most willing to apply its product liability laws extraterritorially: the US. Country most willing to apply its product liability laws extraterritorially: the US. Considerations of US courts in deciding whether to exercise jurisdiction in a product liability case: Considerations of US courts in deciding whether to exercise jurisdiction in a product liability case: Personal jurisdiction: plaintiff must show that the defendant had _________________ with the forum state.Personal jurisdiction: plaintiff must show that the defendant had _________________ with the forum state. Forum non conveniens: used in lieu of a the subject matter jurisdiction inquiry the courts apply in antitrust cases.Forum non conveniens: used in lieu of a the subject matter jurisdiction inquiry the courts apply in antitrust cases.

18 A. HOME STATE REGULATION OF MNEs Forum non conveniens: A court will decline jurisdiction over a dispute if it could be better decided ___________.Forum non conveniens: A court will decline jurisdiction over a dispute if it could be better decided ___________. Criticism: Forum non conveniens allows multinational companies to avoid product liability for injuries that occur outside the US (especially in developing countries were the remedies available to claimants are often limited both legally and practically). Criticism: Forum non conveniens allows multinational companies to avoid product liability for injuries that occur outside the US (especially in developing countries were the remedies available to claimants are often limited both legally and practically).

19 A. HOME STATE REGULATION OF MNEs Sharp Practices Sharp Practices Defined: Dishonest business dealings meant to obtain a benefit for a firm regardless of the means used.Defined: Dishonest business dealings meant to obtain a benefit for a firm regardless of the means used. Laws regulating sharp practices internationally:Laws regulating sharp practices internationally: Organization for Economic and Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Organization for Economic and Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. National legislation applied extraterritorially National legislation applied extraterritorially Example: US Foreign Corrupt Practices ActExample: US Foreign Corrupt Practices Act

20 A. HOME STATE REGULATION OF MNEs US Foreign Corrupt Practices Act (FCPA) of 1977.US Foreign Corrupt Practices Act (FCPA) of Antibribery provisions. Antibribery provisions. Apply to:Apply to: US companies or companies registered with the US Securities and Exchange Commission. US companies or companies registered with the US Securities and Exchange Commission. Officers, directors, agents, or employees of those companies. Officers, directors, agents, or employees of those companies. Forbid bribes to:Forbid bribes to: Foreign government officials. Foreign government officials. Foreign _________________ officials. Foreign _________________ officials. Candidates for foreign political office. Candidates for foreign political office.

21 B. HOST STATE REGULATION OF MNEs Rationales for Host States Regulating MNEs Rationales for Host States Regulating MNEs The foreign firm consents to the jurisdiction of the host state.The foreign firm consents to the jurisdiction of the host state. The foreign firm is part of a common enterprise with a local firm.The foreign firm is part of a common enterprise with a local firm. The foreign firm owns a local subsidiary and the subsidiary’s corporate veil is pierced.The foreign firm owns a local subsidiary and the subsidiary’s corporate veil is pierced.

22 B. HOST STATE REGULATION OF MNEs Consent to Host State Jurisdiction Consent to Host State Jurisdiction Express consent is given by:Express consent is given by: ______________ in the state. ______________ in the state. Maintaining the firm's head office in the state. Maintaining the firm's head office in the state. Obtaining a certificate to do business in the state. Obtaining a certificate to do business in the state.

23 B. HOST STATE REGULATION OF MNEs Implied consent is inferred from a firm:Implied consent is inferred from a firm: Carrying on business. Carrying on business. Directly soliciting business. Directly soliciting business. ____________ engaging in profit-making conduct. ____________ engaging in profit-making conduct.

24 B. HOST STATE REGULATION OF MNEs Common Enterprise Liability Common Enterprise Liability Rationale: Imposed on individuals or companies who participate in a common enterprise.Rationale: Imposed on individuals or companies who participate in a common enterprise. Basis of liability: The participants act as joint venturers or partners. Basis of liability: The participants act as joint venturers or partners. Extent of liability: Each participant has joint or ________________ liability for the obligations of the entire enterprise. Extent of liability: Each participant has joint or ________________ liability for the obligations of the entire enterprise.

25 B. HOST STATE REGULATION OF MNEs Establishing the existence of a common enterprise: Look at the intent of the parties.Establishing the existence of a common enterprise: Look at the intent of the parties. Express intent: A formal agreement creating a joint venture or partnership. Express intent: A formal agreement creating a joint venture or partnership. Implied intent: Implied intent: Sharing profits and losses.Sharing profits and losses. Sharing management functions.Sharing management functions. Joint ownership of affiliates.Joint ownership of affiliates. Holding out to public as a common enterpriseHolding out to public as a common enterprise

26 B. HOST STATE REGULATION OF MNEs Piercing the Company Veil: Ignoring the corporate structure of a company (i.e., piercing the company veil) and exposing the shareholders (or a parent company) to liability. Piercing the Company Veil: Ignoring the corporate structure of a company (i.e., piercing the company veil) and exposing the shareholders (or a parent company) to liability. Criteria for piercing the veil:Criteria for piercing the veil: The controlled company The controlled company The alter ego company The alter ego company Undercapitalization Undercapitalization Personal assumption of liability Personal assumption of liability

27 B. HOST STATE REGULATION OF MNEs The Controlled Company: The corporate status of a controlled company will be ignored if both:The Controlled Company: The corporate status of a controlled company will be ignored if both: Its financing and management are so closely connected to its parent that it has no independent decision-making authority, and Its financing and management are so closely connected to its parent that it has no independent decision-making authority, and It is induced to enter into a transaction detrimental to it and to ______________ but beneficial to the parent. It is induced to enter into a transaction detrimental to it and to ______________ but beneficial to the parent.

28 B. HOST STATE REGULATION OF MNEs The Alter Ego Company: The company’s owners do not treat it as a separate juridical entity, but as their alter ego.The Alter Ego Company: The company’s owners do not treat it as a separate juridical entity, but as their alter ego. Undercapitalization: The owners intentionally provided the company with insufficient capital to meet its prospective debts or potential liabilities.Undercapitalization: The owners intentionally provided the company with insufficient capital to meet its prospective debts or potential liabilities. Personal Assumption of Liability: The owners guaranteed the obligations of the company.Personal Assumption of Liability: The owners guaranteed the obligations of the company.