Preview of International Issues for 2006
Events and trends of 2005 portend a rapid pace of regulatory and trade developments in 2006. Some changes, such as a ramp-up in enforcement and penalties, occurred across regulatory areas, with FCPA and export controls penalties reaching all-time highs and breaking new ground with deferred prosecution agreements, compliance monitors, disgorgement of profits, and other collateral consequences. New guidelines on financial penalties are in the news at both the SEC and OFAC, and FCPA issues appeared on the front pages of newspapers as well as in your local theaters, as Syriana brought the FCPA into Hollywood’s lexicon. And, reinforced by rising government expectations, international compliance and risk assessment are emerging as critical elements of sound business planning.
Under the auspices of the United Nations, this past year saw the newest, and most ambitious, anti-corruption convention, and 2006 will see historic Doha Round trade negotiations under the WTO. Not only will the Doha Round feature ubiquitously difficult issues of agricultural trade, but it will also seek to expand services, industrial goods, government procurement and investment rules, all under the shadow of the scheduled expiration of U.S. trade promotion authority in 2007.
On a parallel track, the U.S. agenda for bilateral free trade agreements remains full, and reflects an evolution of thinking on such key issues as investment, intellectual property, capacity building, dispute settlement, and corruption. U.S. anti-dumping rules will continue to receive WTO scrutiny, although the traditional battle lines are shifting. And the WTO’s historic ruling in the FSC case has now spawned a new provision of the U.S. Tax Code Section 199 that offers broad tax benefits to many unsuspecting U.S. companies.
The coming year will also reflect the effects of leadership changes in many key agencies: Customs, OFAC, the Departments of Justice, State, and Commerce, and elsewhere. And we are proud of the high-quality additions to Miller & Chevalier’s International Department who are listed on page 10.
From all of us at Miller & Chevalier’s International Department, best wishes for the New Year, which holds little promise of being uneventful.
Diversity in Sanctions in FCPA Cases Likely to Continue
Aggressive enforcement of the Foreign Corrupt Practices Act (FCPA) by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) continued in 2005. Enforcement actions included the use of Deferred Prosecution and Non-Prosecution Agreements against corporate entities; record-setting penalties (over $28 million imposed on the Titan Corporation); disgorgement of profits; and tax, conspiracy, and related charges.
In addition, in all five FCPA cases settled in 2005, the DOJ and SEC required companies to retain an Independent Compliance Monitor or Consultant for a period of three months to three years. The companies were required to retain and pay the fees of the monitor while the monitor carried out the obligations specified in the settlement agreements. Having both served as a monitor and assisted clients in selecting and coordinating with monitors, we can confirm that the use of monitors raises a range of legal issues, from basic issues relating to client loyalty to far-reaching issues of attorney-client privilege. While the use of Independent Compliance Monitors and Consultants is still in its infancy, enforcement officials have stated their intention to require them in most FCPA settlements. In the coming year, we can expect to see some further refinement in compliance monitor requirements, more debate about privilege issues, and decisions on the extent to which compliance monitor reports will be made publicly available.
Finally, the SEC began 2006 with a new statement of policy (issued January 4) on financial penalties against corporations that may profoundly affect penalties in future SEC FCPA cases. Issued by a unanimous Commission, the statement highlights not only cooperation and remediation, but also re-focuses on the possible effects of large fines on shareholders. This new articulation of SEC policy will present companies and their counsel with new opportunities to argue for leniency or non-prosecution.
UN Anti-Corruption Convention Comes into Force; Implementation to Follow
On December 14, 2005, 90 days after the signature and ratification by 30 states, the United Nations (UN) Convention Against Corruption entered into effect. In the coming year, we will see the challenges of implementing this ambitious convention in 140 signatory countries, some of which have entrenched cultures of official corruption. Broader than the FCPA and other international anti-corruption agreements, the UN Convention not only criminalizes bribes to public officials, but also includes law enforcement assistance obligations, an asset recovery regime for the proceeds of corruption, anti-money laundering procedures, technical assistance to developing countries, and various transparency and preventative measures.
Unlike the Organization for Economic Cooperation and Development and European Union anti-corruption agreements, the UN Convention includes no monitoring mechanism to ensure adequate implementation and enforcement by signatories. The lack of any monitoring process will make it difficult to gauge whether individual countries are implementing and enforcing the convention and working in good faith to comply with its many requirements.
Apart from the pace at which signatory countries continue to ratify the convention, assessing its impact will be complicated by the convention’s complexity. It is clear, however, that the Convention will increase the enforcement reach of national authorities and broaden the criminal and civil liability risks for companies conducting transnational business. The much-watched private right of action provision may also get its first tests. At the same time, the existence of the UN Convention may make it easier for multinational companies to insist on and obtain contractual anti-corruption and penalty provisions that would sanction any improper payments.
Oil-for-Food Investigations Likely To Proliferate in 2006
The UN-appointed Independent Inquiry Committee (IIC) of Paul Volcker, Richard Goldstone, and Mark Pieth has completed its investigation of the UN Oil-for-Food program, and on October 27, 2005, the IIC issued its voluminous fifth and final report. Although the IIC has no independent law enforcement authority itself, its report will have repercussions well into 2006 and beyond.
The final report named 2,253 companies that the IIC found had made more than $1.5 billion in unlawful surcharges on purchases of Iraqi oil and improper fees imposed on contracts for the sale of humanitarian goods. Such surcharges and fees were in violation of both the terms of the Oil-for-Food program and UN sanctions. These payments, and others, also may have been in violation of various U.S. laws, including Office of Foreign Asset Control (OFAC) regulations and possibly the FCPA.
Press reports indicate that criminal investigations are underway in a number of European countries, with political casualties already having been reported in some national governments as well as at the UN itself. One U.S. grand jury has already returned indictments, and the SEC has issued a broad set of information requests relating to participation in the Oil-for-Food program.
Because Iraq (while subject to UN embargo) elected to do business primarily with countries that resisted the UN sanctions, relatively few American companies were listed in the IIC’s report. However, U.S. companies have received document requests from U.S. investigators, who can be expected to look for grounds to assert jurisdiction over not only U.S. companies or nationals that may have been involved, but also foreign affiliates of U.S. companies and unrelated foreign companies where there exists some jurisdictional nexus to the United States.
The Changing Face of Effective Internal Investigations
Having recently conducted more than a dozen internal investigations, several involving multiple countries, we have seen fundamental changes in how effective internal investigations are, or should be, conducted. Requirements of the Sarbanes-Oxley Act (SOX) and the urgings of enforcement officials that companies disclose violations voluntarily and promptly have increased the number of internal investigations, and raised the likelihood that results of investigations will ultimately be disclosed to government enforcement officials. Agencies are also insisting that companies immediately act to preserve documents, including often voluminous electronic files or data. And under their own guidelines, agencies are reserving the right to request, at least in some circumstances, waiver of privilege and a measure of cooperation.
These dynamics have, in turn, affected how companies decide to structure and conduct investigations. Companies often face pressure to make decisions about self-reporting before they have had an opportunity to fully evaluate the seriousness of a possible issue or violation. With the higher likelihood of ultimate disclosure comes the question of whether the traditional admonition given to interviewees should now be modified. Also at issue is whether the company should take the common step of preparing an investigative report or consider the alternatives of either no written report at all, or two reports a confidential, internal report and a disclosure report intended for government consumption.
When internal investigations are necessary, we have found that it is often possible to use various techniques to control costs and keep investigations manageable without compromising their completeness or integrity.
M&A Due Diligence as a Best Practice
In 2005, the trend toward formal compliance due diligence in the M&A context that we first forecasted in our 2003 issues preview progressed closer to an established “best practice.” We expect that this trend will continue in 2006, as U.S. enforcement officials continue to press in this area, assisted by voluntary disclosures inspired by SOX and a heightened commitment to compliance. The series of FCPA enforcement actions in the M&A context, which began with Syncor in 2002, continued in 2005, and in March the Titan settlement resulted in the largest set of fines and penalties in the history of the FCPA. Parallel trends in export controls also continued in 2005.
As a result, companies have begun to establish M&A compliance due diligence protocols, which provide a “Phase I” determination of the target’s compliance risk profile and quickly focus on key risk areas to be explored in greater depth. We have seen a fairly high level of cooperation from targets in these efforts, perhaps as a result of growing recognition that buyers will abandon transactions that present significant compliance uncertainties.
M&A compliance due diligence serves several purposes. First, it identifies potential successor liability risks, which, as past cases have shown, can be deal killers. Equally important, effective compliance due diligence provides critical information before closing not only about a target’s risk profile, but also about its compliance culture, infrastructure, and program details. This can smooth and accelerate the post-acquisition transition that can otherwise consume tremendous financial and management resources and quickly dissipate the value of the acquisition.
Doha in 2006: What Lies Ahead in Global Trade Negotiations?
As we enter 2006, the crystal ball for the Doha Round of the World Trade Organization (WTO) negotiations is cloudy. The United States, and most other major powers, identify a successful negotiating round as their top trade priority, but the Doha Round is confronting a difficult array of political obstacles.
Further trade liberalization and global economic integration will confront antiquated, but politically popular, public policy structures in both developed and developing countries. The Doha Round will also reflect the rise of developing countries as major players in global trade negotiations and the consensus reached at the outset of this round that agriculture would be at its core.
Conflicting interests over these sensitive issues have thus far produced the Gordian knot of Doha. The hefty Doha services and industrial goods agendas both of which have their own sets of conflicts have taken a back seat to agriculture, to the chagrin of many traditional supporters of trade agreements, especially in the developed world. Time is running out to advance these challenging multilateral agendas, especially for the United States, whose existing trade promotion authority expires by mid-2007.
The coming year has the makings of a watershed for U.S. and global trade policy. Will the historical momentum of successive trade agreements succumb to hesitation, or even backtracking? The work we are doing for clients deeply involved in the Doha Round negotiations has underscored the high economic stakes that these negotiations present and the importance in helping shape trade policy in the United States in the months ahead.
Doha Causes Domestic Stress Over Agriculture
With the prospect that the Doha Round negotiations may affect global agriculture markets as never before, U.S. agriculture policymakers will be grappling intensely with the task of writing a new farm bill by 2007.
Throughout 2006, the House and Senate Agriculture Committees will hold a series of hearings to review the effectiveness of individual programs and to discuss how best to prepare for a new WTO agreement. If the ambitious agriculture proposal that Doha Round negotiators recently tabled becomes the basis of an agreement, it would require substantial revision of several important U.S. programs, especially those affecting sectors subject to high tariff protection and trade distorting domestic support. Dairy, sugar, and other commodities such as cotton, wheat, rice, and fruits and vegetables could be affected by revisions. Even without major progress in Doha, agriculture programs will increasingly be scrutinized under existing WTO rules as was the case in the cotton dispute settlement, which requires the U.S. to change its policies in order to come into compliance.
As the year progresses, House and Senate committee members will put together the first drafts of a bill. Complicating their task will be increasing pressure to limit the budgetary impact of legislative changes. Tensions will be unavoidable as U.S. trade negotiators seek greater market access for U.S. industries and consumers and farm policymakers do their best to smooth the transition for U.S. farmers.
Broadened WTO Government Procurement Negotiations to Begin
After years of delay, members of the WTO Agreement on Government Procurement (GPA) are expected in 2006 to complete negotiations updating the text of the Agreement and to move forward to the core issue of market access concessions.
Members of the GPA, the only multilateral agreement governing access by suppliers to foreign government procurement markets, are primarily major industrialized countries, including the European Union (pre-expansion), Canada, and Japan. Many of the concessions granted in the GPA are now technologically outdated, and issues of closed markets persist, most notably, in Japan, Korea, and Europe. The giant looming issue remains China’s promised accession to the Agreement, for which negotiations have yet to begin.
An additional problem for the United States will be efforts by U.S. states to “withdraw” from the GPA. While it is doubtful that states have the legal authority to withdraw, the mere threat of their attempting to do so could complicate negotiations, and result in retaliatory discrimination against suppliers from non-cooperating states.
More FTAs On The Horizon
While the Bush Administration’s trade agenda remains focused primarily on the Doha Round negotiations, the White House will continue to press ahead with its ambitious effort to negotiate and conclude a number of new bilateral free trade agreements (FTAs) this year.
Having secured a two-year extension of the trade promotion authority through mid-2007 last summer, the Office of the U.S. Trade Representative (USTR) will attempt to hammer out FTAs with Colombia, Ecuador, Panama, Thailand, the United Arab Emirates and the five nations that make up the South African Customs Union (SACU) Botswana, Lesotho, Namibia, Swaziland and South Africa. Moreover, possible FTA negotiations are also under consideration for Malaysia, South Korea and Switzerland.
Some of the ongoing negotiations are encountering difficult obstacles, however. Colombia, Ecuador and the SACU countries, for example, are still far apart on critical agriculture market access and intellectual property rights issues, and Panama and Thailand are wrestling with key services access issues.
Were this already heavy FTA agenda not enough, late last year the United States and Egypt established 14 working groups to explore a prospective FTA, and the Bush Administration is expected to announce the launch of an FTA with Egypt as early as this month or next. The most populous Arab country, Egypt would present significant opportunities for U.S. agricultural and manufactured goods exports in a market historically dominated by the European Union.
Anti-Dumping Laws Under Scrutiny
During the Uruguay Round of multilateral trade negotiations, Japan, Korea, and many other countries that depend heavily on exports to sustain their economies tried to weaken the anti-dumping (AD) laws of various WTO Members, especially the United States and the European Union. To an extent they succeeded. For example, the AD agreement that resulted from the Uruguay Round required signatories for the first time to conduct “sunset” or “expiry” reviews every five years to determine if AD measures should be terminated.
But to the opponents of the AD laws, the Uruguay Round was just one battle in a long war. Challenging AD actions under the WTO’s binding dispute settlement mechanism is part of that war. Indeed, about 20% of all WTO dispute settlement proceedings concern AD measures, and when challenged, anti-dumping measures are rarely found to be free of defects.
With the launch of the Doha Round of WTO negotiations, a new “front” opened in the war on AD. But this time the United States and other traditional users of these laws have unexpected allies. Egypt, India, South Africa, Mexico, China, and many other countries that have responded to global trade liberalization with their own AD laws have started to object to proposals to weaken or complicate the administration of national AD laws. As a result, the AD debate in the coming year will see both new dynamics and some new bedfellows.
An Appellate Court for Investor-State Arbitration
A key element of the investment chapter of the FTA for the Dominican Republic and Central America (CAFTA-DR), which enters into force for some signatories in early 2006, is a provision mandating negotiations on an appellate framework for reviewing arbitral awards. The parties are required to commence such negotiations within three months of entry into force and to agree to a framework within one year. The intended appeal structure, the first for FTA investment disputes, reflects concern in the United States that arbitral decisions should be subject to appellate review.
The clear mandate to establish a review structure will confront issues of the correct structure, grounds for appeal, and selection and number of arbitrators. More important, the unavoidable delay inherent in any appellate review of arbitral decisions will undercut one of the principal benefits of binding investor-state arbitration.
U.S. Success in NAFTA Investment Disputes Continues
In another stunning victory, 2005 saw the United States prevail in a billion dollar investor-State suit brought by Methanex, a Canadian manufacturer of methanol. Methanex claimed that California’s decision to ban MTBE, a gasoline additive, because of its environmental effects was the result of a conspiracy to discriminate against Methanex, in order to benefit Archer Daniels Midland (ADM), the major U.S. producer of ethanol, a competing additive. The case created significant controversy in the United States among environmental groups and others concerned about its chilling effect on U.S. regulatory policy.
In what can be described as a thorough rebuke, Methanex lost on every claim, and was ordered to pay the United States’ legal costs of approximately $4 million. Accepting measures to protect public health as legitimate, the arbitrators accepted recent interpretations of the North American Free Trade Agreement (NAFTA) Chapter 11 text by the NAFTA governments that narrowed its scope, received and considered amici submissions, and opened the hearings to the public.
In addition, the arbitrators resisted pressure to accept trade disputes or employ trade concepts in Chapter 11 investment disputes. Specifically, they refused to employ the “like product” trade analysis to the term “in like circumstances” in assessing national treatment and declined to read in WTO principles and provisions not specifically found in the NAFTA text. These holdings may have implications for other NAFTA investor- State cases lined up (e.g., lumber and BSE) in which investors are attempting to resolve what are arguably trade disputes through Chapter 11.
In more than one Chapter 11 case, the results have suggested that bad facts will not produce good results and that it will be hard to force trade disputes into Chapter 11. How long will the United States keep winning? Aside from the trade-investment cases, the streak could end because there are other cases in the pipeline that may break the record, if not the treasury.
Section 199 of the IRC: Tax Fruits of the Trade Tree
The contentious recent WTO dispute over the FSC provisions of the U.S. Internal Revenue Code (IRC) has led to a new tax provision, Section 199, that provides substantial new tax benefits for U.S. producers, but has attracted relatively limited attention outside the tax community. The tax deductions available to businesses engaged in production activities in the United States will be implemented in Final Treasury Department regulations expected in the spring of this year.
In October 2004, Congress enacted Section 199 to provide a new tax deduction. Unlike earlier tax incentives that had been disallowed by the WTO, the new “production deduction” under Section 199 is based upon the location of the production activities, without regard to where the final goods are sold. Sometimes referred to as the “manufacturing deduction,” the new tax incentive is not limited to traditional manufacturers. Instead, the deduction is available to any taxpayer that engages in a wide range of activities in the United States.
The new provision offers attractive tax benefits for those businesses engaging in the qualifying production activities. The deduction is designed to be economically equivalent to a three-percent tax rate reduction when fully phased in. The deduction is available for 2005, but at a slighter lower rate. Even those taxpayers with no taxable income may derive a tax benefit, as the deduction can be applied against a taxpayer’s alternative minimum tax liability.
As with so many tax provisions, however, the new deduction is complex and has been complicated further by an administrative notice and proposed regulations, which require difficult, subjective decisions in computing the deduction. In working with clients, both to help shape the new Treasury regulations and to maximize benefits, it is clear that substantial benefits are more widely available than many assume, but may require performing a technical analysis of a company’s production activities and earnings.
Continued Focus on Heightened Enforcement and Penalties
Export controls enforcement continued to increase in 2005. The Commerce Department’s Bureau of Industry and Security (BIS) imposed $6.8 million in civil penalties in 69 administrative settlements in FY 2005, surpassing the totals of the two prior years. In many cases, BIS multiplied penalties by charging additional violations on top of unlawful exports or re-exports (e.g., acting with knowledge of a violation, conspiracy to violate the Export Administration Regulations, and violations relating to Shipper’s Export Declarations). Many BIS cases, including some with high fines, arose from voluntary disclosures.
While the State Department’s Directorate of Defense Trade Controls (DDTC) continued to close out virtually all of its voluntary self-disclosures with no civil penalty actions, it has increasingly requiring companies disclosing International Traffic in Arms Regulations (ITAR) violations to adopt aggressive remedial measures. Remedial steps can include additional internal investigation and compliance program enhancements. We have also seen signs that DDTC is using the notification process relating to mergers and acquisitions as an opportunity to require companies to conduct ITAR due diligence and report violations. This trend, recently referred to as “directed remediation” by David Trimble, DDTC’s Director of Compliance, will undoubtedly continue in 2006.
A similar upward trend continued in criminal enforcement, with the DOJ stepping up enforcement of export control violations as part of its focus on the prosecution of national security crimes. In FY 2005, BIS investigations led to 31 criminal convictions resulting in $7.7 million in criminal fines. Increasingly, criminal prosecutions are targeting not only companies, but also company executives for their roles in export control violations.
Finally, BIS officials appear to have renewed their resolve to push for an amendment of the International Economic Emergency Powers Act to significantly increase civil penalties for export control violations. BIS officials have stated publicly that the current penalty cap of $11,000 per violation could be increased to as high as $250,000 per violation. Such a hike in penalty levels would, needless to say, dramatically increase the stakes for U.S. exporters who find themselves in an enforcement action.
A More Enlightened Approach to Economic Sanctions Enforcement?
OFAC has recently published an interim final rule prescribing sanctions enforcement procedures for banking institutions. Like OFAC’s current penalty guidelines, the new enforcement procedures enumerate a variety of aggravating and mitigating factors to be considered in resolving enforcement actions under U.S. economic sanctions regulations.
In a departure from the current formulaic approach that many have described as bean counting, “the procedures spell out an institutional - rather than a transactional - approach to enforcement, taking into account risk-based efforts by financial institutions to ensure OFAC compliance, as well evaluating violations that appear to have occurred.” According to OFAC Director Robert Werner, “OFAC recognizes the uniqueness of every institution’s compliance program and how each program must be geared toward the size of a bank’s accounts, its business volume, its customer base, and its product lines.” Consistent with the stated objective, the new penalty procedures call for OFAC to examine the totality of the circumstances, including: the nature of and reason for the violation; the company’s compliance efforts and culture, past and remedial; and whether the violation could have been prevented through additional compliance safeguards.
In addition, Director Werner and other senior OFAC officials have suggested that settlements of OFAC enforcement actions may be more prescriptive in approach, with monetary penalties serving as only one tool to encourage compliance. (On a separate but related note, OFAC has already begun publishing more detailed enforcement case summaries on its website.) Though it is probably naïve to expect the new penalty procedures to prompt a sea change in sanctions enforcement, OFAC’s self-described paradigm shift could reflect an evolutionary first step toward encouraging compliance as opposed to merely punishing non-compliance. The penalty procedures become effective on February 13, 2006; OFAC is soliciting public comment until March 16, 2006.
New Leadership at Customs Calls for Increased Enforcement
U.S. Customs and Border Protection (CBP) lost several senior officials this year, the most important of whom was Commissioner Robert C. Bonner, who returned to private life on November 23. Other notable departures were those of Michael Schmitz, Assistant Commissioner for Regulations and Rulings, who will now ply his trade in Brussels as head of a Directorate at the World Customs Organization, and Betsy Durant, Executive Director for Trade Enforcement and Facilitation, who has retired. So far, only one of these high-level officials has been formally replaced: Ms. Durant’s successor will be Vera Adams, former Acting Director of Field Operations for the ports of Los Angeles and Long Beach.
So what effect will the new leadership have in 2006? Ms. Adams already has given a clue: aggressive enforcement of commercial fraud will be a top priority. In an interview in the Journal of Commerce, she stated, “We are putting a greater emphasis on commercial smuggling, and the consequences of engaging in mismanifesting and misdescription to evade detection. Those who engage in commercial fraud and diversion can expect a lot of attention.” Thus, the first major change by CBP in 2006 could be a new emphasis on commercial enforcement after ten years of stressing commercial compliance.
It is unlikely that CBP will jettison the Importer Self-Assessment program, which generally insulates importer-participants from monetary penalties, but a new emphasis on commercial enforcement might mean that CBP will no longer be satisfied with recouping the lost revenue resulting from importer errors discovered during a Focused Assessment audit, and that it will seek monetary penalties as well.
Push for Improvements to C-TPAT Likely to Continue
The push for improvement to the Customs-Trade Partnership Against Terrorism (C-TPAT), one of the cornerstones of the Department of Homeland Security’s effort to secure the country against terrorism, is likely to continue in 2006. While CBP has trumpeted the benefits of participation, the benefits offered by C-TPAT remain largely illusory.
One tangible benefit offered at land borders is the availability of a “green lane,” a separate traffic lane for importers/truckers that are C-TPAT participants and that carry low risk merchandise. The Customs Operations Advisory Committee (COAC) to the Department of page 8 Homeland Security has proposed to adopt the “green lane” approach for imported merchandise arriving by air and ocean. While COAC recognizes that a separate traffic lane is not feasible for such cargo, it has proposed numerous benefits that it believes should be offered to those companies that have adopted the most stringent security criteria including, among other benefits:
- Permission to file almost all entries remotely and on a paperless basis
- Expedited drawback claims
- Zero inspections except for security targeting
- Expedited response to ruling requests
- Tier 3 status treated as an additional mitigating factor in penalty and liquidated damages cases
- No CF 28s - Request for Information
- No penalties, except interest, for late duty payments
It is unclear whether CBP will adopt any of these proposals, but the pressure is on the agency to find a way both to create incentives and to reward companies that adopt “best practice” security measures. If there is no change in the status quo, Congress may step in to strengthen the program. Senators Murray and Collins recently introduced the “Green-Lane Maritime Security Act,” which could serve as a legislative vehicle in 2006 for modifying and codifying C-TPAT.
New Drawback Law Expected in 2006
A change likely to occur in 2006 that could affect customs and border security is the passage of a new drawback law. Currently, the almost impenetrably complex and administratively burdensome world of drawback is simply not cost effective. The proposed revisions reflect sustained efforts by industry and government representatives to find a better, simpler, automated way to administer drawback.
The joint industry/government representatives who crafted the new drawback proposal have attempted to simplify record keeping and claims processing and to eliminate confusing requirements. Examples of proposed changes include allowing anyone to be a drawback claimant, electronic filing of drawback claims, basing qualification for drawback on whether domestic and imported goods are classified under the same 8-digit HTSUS number, and moving to an electronic, not paper, audit trail.
There remain issues over which industry and government disagree, but these issues should be resolved during 2006, as the benefits of the proposed changes are considerable.
CBP Holds New Hearings for Redesign Determinations in Section 337 Enforcements
Section 337 of the Tariff Act of 1930 can provide owners of U.S. intellectual property rights (IPR) with exclusion orders issued by the International Trade Commission (ITC) that stop infringing imported goods from entering the United States. However, Section 337 remedies can be tested when a foreign importer seeks to import a redesigned article that it claims falls outside the scope of the existing exclusion order.
Historically, U.S. Customs and Border Protection (CBP) has resolved disputes over whether re-designed goods continue to infringe through an opaque ex parte process in which CBP accepted submissions and made final determinations without informing opposing parties about the bases for its decision. While CBP’s process maintained confidentiality, it invited both frustration and criticism from parties on both sides of exclusion orders.
Recent changes suggest that CBP has begun to explore using a new process on a test basis. In the most recent redesign matter before it, CBP held a final hearing before two of its administrators at which both the complainant and respondent were allowed to offer both direct and rebuttal evidence and legal arguments. The hearing was followed by a post-hearing briefing. Although CBP has not adopted a new official policy, this procedure may continue to be used and may even be formalized.
Although the new process provides for no factual discovery and limits access by a complainant to confidential details of a redesign, it provides a more transparent and certain undertaking than CBP’s prior procedures. These new hearings should afford litigants at the ITC greater confidence that ITC orders will be properly enforced, infringing products excluded, and legitimate redesigns cleared for import.
IPR Holders Aggressively Combat Infringing Goods from China
Concerns over China’s IPR enforcement will remain at the top of the U.S.-China trade agenda in 2006. Infringing Chinese goods accounted for 69% of all U.S. Customs seizures of infringing goods in FY 2005 an all-time high and are entering international commerce in a wide range of product categories, including auto parts, computer hardware and consumer electronics. Similarly, 35% of all new Section 337 cases filed in 2005 involved Chinese imports.
The problems are in fact global in scope, as companies struggle to address Chinese knock-offs not just in the U.S. market, but also in China and many other important third-country markets. As a result, many companies now see China IPR issues as a top corporate priority for which there is no “silver bullet” solution. Rather, companies are adopting an aggressive, multi-pronged approach to defending their IPR.
Private sector pressure on Congress and the Bush Administration to focus on China’s IPR enforcement problems have already produced results. High-ranking Administration officials are frequently raising the issue with their Chinese counterparts, and USTR recently requested that China provide detailed information on its IPR enforcement under WTO transparency provisions. And because of the potent remedies it offers, Section 337 has proven to be an effective and increasingly popular remedy against infringing goods from China.
Fast systemic change in China’s IPR enforcement nonetheless remains unlikely. However, some Chinese companies competing on the global stage have shown a greater willingness to do at least rudimentary IPR due diligence, to appear in litigation to defend themselves, and to recognize the need to consider licensing or product redesign.
International Department News
Miller & Chevalier lawyers and other professionals chaired or participated in more than twenty-five seminars and other forums in 2005.
In 2006, International lawyers will chair, co-chair or speak at a number of conferences and symposiums related to areas in which we specialize. Events which are scheduled to take place over the next several months include:
- “International Corporate Compliance”; January 19-20, 2006; The Center For American and International Law; Plano, Texas; Conference Chair and Speaker: Kathryn Cameron Atkinson; Other Speakers: Josephine Aiello LeBeau, Homer E. Moyer, Jr., Mary Lou Soller.
- “Doha Development Agenda”; February 5-8, 2006; International Sweetener Colloquium; Hollywood, Florida; Speaker: Jon E. Huenemann.
- “Toward a New Investment Regime in Latin America: What Investors Need To Know”; February 24, 2006; Cameron & May; Miami, Florida; Conference Chair and Speaker: Mélida N. Hodgson; Other Speakers: Jon E. Huenemann, Homer E. Moyer, Jr., Matthew M. Nolan.
- “Defense Industry Compliance”; March 13-14, 2006; ACI; Washington, D.C.; Speakers: Kathryn Cameron Atkinson, James A. Bensfield, Mark J. Rochon.
- “International Trade and Investment Agreements”; March 16-17, 2006; International Tax Institute (ABA); Washington, D.C.; Panel Co-Chair and Speaker: Myles S. Getlan.
- “Import Compliance”; March 21-22, 2006; ACI; Washington, D.C.; Panel Moderator: Matthew M. Nolan.
- “Foreign Corrupt Practices Act”; March 28-29, 2006; ACI; New York City; Conference Co-Chair and Speaker: Homer E. Moyer, Jr.; Workshop Leaders: Kathryn Cameron Atkinson, John E. Davis.
- “Export Controls”; April 19-20, 2006; ACI; Washington, D.C.; Conference Co-Chair: William M. McGlone; Speaker: Josephine Aiello LeBeau.
- “The Awakening Giant of Anti-Corruption Enforcement”; May 4-5, 2006; International Bar Association; London; Conference Co-Chair and Speaker: Homer E. Moyer, Jr.
- “Foreign Issuers and U.S. Securities Laws 2006: Strategies for the Changing Regulatory Environment”; May 11, 2006; PLI; New York City; Conference Co-Chair and Speaker: Homer E. Moyer, Jr.
Over the last 12 months, members of the firm’s International Department have authored or co-authored over 60 client alerts, conference papers, and articles featured in such publications as The International Economy, The National Law Journal, Legal Times, The Journal of Commerce, Business Laws, Inc., The Tax Executive, Influence, The Hill, and Washington Legal Foundation. The full text of these articles, papers, and alerts can be found on our website at www.millerchevalier.com.