Preview of International Issues for 2008
For Miller & Chevalier’s International Department, 2007 was an eventful and dynamic year with transitions that will shape our future and a continuing execution of our strategy to expand our preeminent national and international practices with top tier lawyers and professionals. As a result, entering 2008, Miller & Chevalier’s International Department is well positioned to continue its tradition of providing effective client representation and delivering superior client service in our areas of expertise.
We are fortunate to have made a number of superb additions to our ranks during 2007, including a number of new colleagues -- some of whom are also old friends and former colleagues -- with national reputations and expertise that will serve our distinguished clients well. These lawyers come to Miller & Chevalier with a mix of senior government, legal and industry experience that enhances the depth and breadth of our existing practices. Chris Parlin and David Christy, among a small group of lawyers whose practices focus on the World Trade Organization dispute settlement and negotiations, bring years of experience to this specialized area that will increasingly provide the operative standards and enforceable norms for international trade. In addition, we are pleased to welcome our newest trade litigator, David Hardin, who brings significant experience litigating anti-dumping and countervailing duty cases and other trade policy expertise.
New member Larry Christensen and Bill Clements (who is Of Counsel to the firm) are now managing our busy export controls and economic sanctions practice, which has been at the core of the Department since its inception. Together, Larry and Bill represent not only more than 20 years of government experience at four government agencies, the Department of Commerce and the National Security Council among them, but also years of private sector experience working with some of the country’s leading exporting corporations. Larry and Bill have been joined by Matt Goldstein, who brings his own developing export controls practice and high tech expertise from the far West.
Barbara Murphy, a recognized and experienced leader of the Section 337 bar, has become a Miller & Chevalier member, joining the firm’s bustling 337 practice, which continues to command an impressive share of this important area of international intellectual property litigation. Another addition, David Nickel, also brings extensive experience in this area of fast-paced, specialized international litigation.
Our FCPA practice, chaired by James Tillen, continues to mushroom, in continuing collaboration with the firm’s talented Litigation Department. Over the past 12 months, more than 40 M&C lawyers have been involved in FCPA-related work. This year, the firm has also added to its growing list of trade policy clients, and Mélida Hodgson has been appointed a Chapter 19 panelist under the NAFTA. Kate Atkinson continues to guide the Department’s expanding compliance practice, and we are deep in the process of adding to our customs practice. The strength of the Department was evidenced not only by the addition of significant new clients with complex projects across the globe, but also by our having been selected from a crowded field of competitors to assist the World Bank in preparing and litigating debarment proceedings involving companies involved in fraud, collusion, or corruption in Bank-funded projects.
Developments in the opening days of 2008 portend a hectic and challenging year ahead for those engaged in international trade and business. In the pages that follow, we discuss some of the anticipated challenges, opportunities, and developments likely to present themselves in 2008.
In short, we move into the New Year well-positioned to provide unsurpassed experience and expertise in a range of international practice areas, including all of those discussed in this Issues Preview. We continue to aspire to national preeminence in the areas in which we practice, an ambitious standard, but one that is appropriate to the distinguished clientele we are privileged to serve. Happy New Year.
John Davis, Chairman, Miller & Chevalier’s International Department
Homer Moyer, Founder, Miller & Chevalier’s International Department
FCPA Enforcement Trends -- From the Horse’s Mouth
In recent public statements, FCPA enforcement officials from both the Department of Justice and the SEC have shed light on the agencies’ enforcement activities and priorities. In 2007, which marks the 30th anniversary of the FCPA, there were 38 enforcement actions, including sixteen cases brought against individuals, most of whom were employees of companies implicated in improper payments. This anniversary year also saw the largest criminal fine to date ($26.2 million), the largest overall fine ($44 million), the indictment of a member of Congress, and the creation of a four-person FBI unit dedicated exclusively to FCPA enforcement.
In November at the year’s largest annual FCPA conference (more than 500 in attendance; chaired by Homer Moyer; Kate Atkinson on faculty), Alice Fisher, Assistant Attorney General for the Criminal Division, reiterated that companies that make voluntary disclosures will receive “a real and tangible benefit.” Citing the Textron, York, and Paradigm cases, Fisher said that the Department had already “made good on that commitment.” Fredric Firestone, SEC Associate Director for Enforcement, added, with some gusto, that companies have been “sprinting in to provide information,” a phenomenon that has received considerable, if serendipitous, impetus from Sarbanes Oxley.
Enforcement officials similarly endorsed “transactional” FCPA due diligence, which the Department of Justice’s chief FCPA enforcement official, Mark Mendelsohn, commented “should be a regular feature of any acquisition” and is “an emerging trend and best practice.” Ms. Fisher stated that FCPA due diligence helps avoid acquiring successor liability, helps determine the true value of the target company, and can avert damage to the acquiring company’s reputation. Areas appropriate to due diligence, she added, include government entities as customers, government regulatory approvals, customs agents, third parties, and joint venture partners that are government entities or officials. A further benefit, not mentioned, but also quite valuable in our experience, is the understanding of the target company’s compliance program and culture that comes with due diligence, which can facilitate and reduce the costs of integrating the target company into the compliance program of the acquirer.
Trends identified by Mark Mendelsohn are (1) a continued focus on cases against individuals, (2) routine use of disgorgement of profits as an element of penalties imposed, (3) parallel investigations by Justice and the SEC in most cases, (4) a “more active role” by foreign regulators (i.e., “Siemens has changed the landscape”), and (5) continued use of independent compliance monitors, albeit with a willingness to tailor monitors’ responsibilities and to consider remediation that companies have already undertaken. Predicting more cases in 2008 than in 2007, he cited as examples of industries of interest: pharmaceuticals, medical devices, biotech, telecom, manufacturing, insurance, banking, and gaming.
Foreign Enforcement of Anti-Corruption Laws Escalates
Following the entry into force of a series of international anti-corruption conventions -- OAS (1997), OECD (1999), Council of Europe (2002), UN (2005), African Union (2006) -- scores of countries adopted implementing national laws, but most were slow to enforce them. In 2007, however, there was a significant up-tick in enforcement, with significant investigations in several European countries.
Garnering most of the headlines was the Siemens case, the largest foreign bribery case to date. As discussed in more detail below, German officials already have fined Siemens 201 million euros ($299 million) and levied 179 million euros ($266.3 million) in additional taxes for 77 bribes that the company’s telecom division paid to win contracts in Russia, Nigeria, and Libya. This fine far exceeds the largest penalty to date in the U.S., which is $44 million.
France, Switzerland, and Italy have also flexed their enforcement muscles. This year French officials investigated and briefly incarcerated the CEO of Total SA, France’s biggest oil and gas group, in connection with potential bribes paid to Iranian officials; Switzerland has both initiated and cooperated in several investigations; and Italy’s investigation into bribes paid by employees of the Italian power generation company Enelpower to win over $1 billion in contracts for the construction of power and desalination plants in the Middle East, for which Siemens had been subcontracted to supply gas turbines, ultimately lead to the Siemens investigation.
In its 2007 Progress Report on the enforcement of the OECD Convention, Transparency International (TI) reported that five of the OECD’s largest exporters (France, Germany, Italy, the U.S., and the Netherlands) are now implementing “significant” enforcement in this area. Japan, the U.K., and Canada have yet to pursue a major foreign bribery prosecution, and the U.K. has been internationally rebuked for dropping its investigation of BAE, which reportedly made $2 billion in illegal payments to Saudi officials in connection with the sale of fighter planes. More than half of the OECD countries reporting have brought some form of foreign bribery prosecution.
U.S. enforcement officials both encourage and assist foreign investigations. Assistant Attorney General Alice Fisher has publicly confirmed the U.S. government’s willingness to support foreign bribery enforcement actions. Last year the Department of Justice conducted over 100 training sessions in 27 countries. SEC Associate Director of Enforcement Fredric Firestone commented that “before, EU officials would wonder what their crazy counterparts in the U.S. were doing; now they are visiting the U.S. for training.” U.S. enforcement officials share information with foreign officials formally, through mutual assistance mechanisms, and informally, through telephone conversations and “spontaneous disclosures” of evidence of violations.
In the wake of its Oil-for-Food investigation, the U.N. has created an independent task force to investigate corruption related to contracts for fuel, food, construction and other materials, and services used in U.N. peacekeeping missions. As 2007 closed, the task force announced that it had identified ten significant instances of fraud and corruption with aggregate value in excess of $610 million, and ten U.N. procurement officials have been charged with soliciting bribes and rigging bids.
Although an up-tick in enforcement is evident in some European countries, the picture elsewhere remains mixed. The UK and Japan remain the OECD countries most criticized for their lack of enforcement. In China, which boasts impressive enforcement statistics and this year established the National Bureau of Corruption Prevention, both enforcement and harsh penalties appear to be random. In Africa and Latin America, broad enforcement is not yet evident, although anti-corruption initiatives and some individual cases continue to appear in press reports.
The Congressional Trade Agenda
As Congress heads into the 2008 election year, the Democratic leadership in both the House and Senate is casting a wary look on trade policy. Popular support for free trade initiatives continued to wane in 2007, with many Democrats attributing their electoral success, in part, to voter antipathy with the trade policies of the Bush Administration. Concerns over various economic irritants with the People’s Republic of China dominated trade debates in Congress and consumed much of the Bush Administration’s attention. Trade Promotion Authority (TPA), the president’s trade negotiating authority, expired last summer and is unlikely to be renewed. Congressional Democrats mostly resisted the Bush Administration’s free trade agreement (FTA) agenda, though they managed to agree with the Bush Administration on a broad set of goals concerning the inclusion of labor and environmental issues in FTAs. These goals were reflected in the Peru FTA, which was approved by Congress in late 2007. Still, three more FTAs -- with Colombia, Panama, and South Korea -- were kicked down the road and still await congressional consideration. The World Trade Organization’s Doha Round negotiations enjoyed only marginal progress and enter this year with low expectations.
Looking ahead to 2008, the congressional trade agenda will again focus on the U.S.-Sino economic relationship. In particular, legislation designed to address currency manipulation by key trading partners will likely revolve around Chinese currency practices, though the practices of Japan and South Korea, among others, could also be under scrutiny. Legislation to strengthen import product safety is also on the agenda. Congress must also decide whether or not to consider the three remaining FTAs, with Colombia, Panama, and South Korea. Reauthorization of Trade Adjustment Assistance (TAA) is also high on the agenda for key congressional leaders, particularly Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways & Means Chairman Charles Rangel (D-NY). In addition, the House is expected to draft a Miscellaneous Tariff Bill (MTB), in which Congress temporarily suspends tariffs on a range of products for which there is no domestic production. Finally, Congress might also tackle a new customs reauthorization bill, as well as permanent normal trade relations with Russia.
U.S.-China Trade Relations
The U.S. trade deficit with China continues to grow, and many in Congress are still concerned about a perceived imbalance between the U.S. dollar and the Chinese yuan, though a weakening dollar seems to have softened U.S. anxieties. Moreover, a series of product safety scares involving Chinese goods intensified fears about the capacity of the U.S. government to regulate the bilateral economic relationship. The Senate Finance Committee -- led by Chairman Baucus and his Republican counterpart, Senator Charles Grassley (R-IA) -- marked up legislation addressing currency manipulation by U.S. trading partners. The legislation would direct the U.S. Treasury Department to do more to identify countries that maintain unfair currency policies and to impose consequences -- such as disapproval of OPIC insurance and international development financing -- for those that do not reform their policies. The Senate Banking Committee, under Chairman Chris Dodd’s (D-CT) leadership, also has an interest in the legislation. Floor consideration awaits while Senate leaders work to integrate the respective roles of the Finance and Banking Committees. Product safety legislation, drafted in response to reports of Chinese shipments of unsafe food and consumer products, is also poised for floor consideration in both the House and the Senate.
Trade Agreements and Trade Adjustment Assistance
With the expiration of TPA, the U.S. trade agreements agenda is in limbo. The Bush Administration has finished negotiation of three FTAs but all three face uncertain futures in Congress. Democrats have opposed the Colombia FTA until that country gets control of labor-related violence. The Panama FTA waits in line behind the Colombia FTA, and the Korea FTA suffers from bipartisan opposition regarding market access for U.S. autos and beef. In the meantime, congressional Democrats have emphasized the need to expand TAA, which helps fund retraining and health care benefits for manufacturing sector workers who have lost jobs as a result of import pressure. In particular, Democrats want to expand the program to include workers in the services sector. However, many Republicans are opposed to an expansion of TAA and have so far opposed even an extension of current law. Historically, the program has enjoyed bipartisan support as part of a political bargain in which Republicans support TAA in exchange for Democratic support of new trade agreements or renewal of the president’s trade negotiating authority. Thus, TAA could face increasing opposition from Republicans in the absence of TPA renewal or congressional consideration of new FTAs.
Progress in the U.S. trade agenda will be difficult and hard-fought this year. U.S. trade policy will be closely scrutinized by Members of Congress skeptical of the benefits of trade agreements. In such a tense atmosphere, passage of new trade agreements is hard enough. In 2008, with a wide open race for the White House and a Democratic majority hanging onto control of Congress by a narrow margin, prospects for a bipartisan consensus on new trade initiatives are dim.
WTO Outlook for 2008
Although 2008 will bring several significant dispute settlement proceedings and another year of Russia’s push to accede, most eyes will be on the Doha Development Agenda. Will this be the year the Doha Round succeeds? Starting with the Doha Round, we examine what 2008 is likely to bring on WTO matters.
The prospects of successful conclusion of the Doha Development Agenda negotiations in 2008 are bleak. The negotiations did not fail in 2007, but they made little progress. Deep divisions remain in all major negotiating areas -- agriculture, non-agricultural market access (NAMA), services and rules (antidumping, subsidies and fisheries subsidies).
WTO Director-General Lamy soldiers on. He has suggested that high-level “horizontal” negotiations starting in late January could break current impasses and enable trade ministers to reach political agreement by mid-2008, which would allow the negotiators to agree upon all the technical details by year end. Regrettably, Lamy’s scenario is highly unlikely for several reasons. First, negotiators have not agreed upon the “modalities” of negotiation (the basic ground rules) for NAMA, services and the market access and domestic support components of the agriculture negotiation. Indeed, they are not close to agreeing - at the December 17 WTO General Council meeting, there was a sharp split between developed country Members and key developing countries on how to proceed. Second, the split on general modalities is compounded by Members’ lack of agreement on the literally thousands of specific issues on which consensus must be achieved. Third, the economic and political climate in many Member countries (including the United States, which will elect a new president) makes it extremely difficult for legislators and senior executive officials to make the domestic concessions that will be necessary to create a universally acceptable global market liberalization package. And last, but not least, the expiry of U.S. Trade Promotion Authority and serious doubts about its renewal in the near future will cause many U.S. trading partners to remain leery of end-game negotiations with the United States. This is understandable -- why should they make difficult concessions with USTR only to be told later that Congress requires additional concessions?
A collapse of the negotiations is unlikely -- trade ministers are loathe to admit failure. So 2008 is likely to be a reprise of 2007, with ongoing technical discussions in Geneva, seeking progress while awaiting a change in the economic and political climate in key Member countries that will enable serious negotiations to resume in 2009 or 2010. Despite the slowdown, private-sector interests should continue to monitor the negotiations and press for inclusion of their desired issues and textual language in the negotiated texts. Although the gloomy forecast for 2008 might suggest this would be a wasted effort, any eventual outcome will build on the groundwork achieved to that time.
Work will not stop at the WTO, even if the Doha negotiations remain moribund. Even as they disagree on what new rules to negotiate, virtually all WTO Members agree that the WTO system offers the best mechanism for regulating international trade. Technical work in the myriad committees and councils will progress largely unnoticed by outsiders, but dispute settlement will be a much more public manifestation of the WTO’s continued functioning.
Anecdotal evidence and historical experience suggest that the number of initiated disputes increases significantly when negotiations stall. Thus, it is very likely that the number of disputes initiated in 2008 will exceed the seven initiated in 2007 (the lowest ever; 34 in 1998 was the most). As the world’s largest economy, the United States can expect to be respondent in 25-33% of these disputes. U.S. agriculture programs and antidumping methodology and decisions almost certainly will be the subject of additional disputes. (Once one Member succeeds, follow-up disputes by others are common.) However, as was the case with Antigua’s challenge to the compatibility of U.S. internet gambling laws with U.S. services commitments, challenges in unexpected areas also are likely. Regular monitoring to get early warning of such new disputes is desirable.
The situation of the United States as potential complainant is different. Unlike those potentially facing challenges to U.S. practices, companies and industries advocating U.S. challenges to others’ trade practices can, and indeed must, play an active role. To date, the Bush Administration has initiated far fewer disputes than its predecessors. It has preferred to seek resolution of problems through the Doha negotiations. If, as likely, the negotiations stall, pressure to challenge others’ trade barriers will become increasingly difficult to deflect. Indeed, a rational political calculation by Administration trade officials may well be that aggressive use of WTO dispute settlement offers the best prospects for changing the current political skepticism in the United States about multilateral trade rules.
Additional initiations against a variety of Chinese trade measures are virtually certain given the current political climate. Actions against numerous Members’ intellectual property rights enforcement regimes also are probable given the strong, consistent lobbying of the IP industry for such challenges. The best opportunity for other industries and companies to press their cause already has passed since the period for public comment regarding USTR’s annual foreign trade barriers report has expired. Nonetheless, concerted effort in support of well-documented trade barriers may convince USTR to initiate a dispute.
The overall health of the WTO system, despite the Doha negotiation’s problems, is evidenced by the number and identity of countries negotiating to accede to (join) the WTO. Twenty-eight countries are seeking to join the WTO’s 152 Members. They include Russia, Ukraine, Algeria, Kazakhstan and Libya. In order to accede, these countries must enact or amend economic, commercial and trade laws, regulations and administrative practices so that they comply with WTO requirements of market access, non-discrimination, transparency and the like. In addition, since accession occurs only when all existing WTO Members consent, each Member has the opportunity to make its agreement contingent on changes (or binding commitments to change) in areas of interest to it (even where the demanded changes may not be required to attain WTO conformity). Thus, the United States agreed to China’s accession only after China completely revamped its financial services and intellectual property regimes and agreed to a “WTO-plus” injury standard in “special safeguard” proceedings against Chinese imports.
Of the countries currently knocking on the WTO’s door, Russia likely offers the most opportunity across the board to U.S. (and other) companies seeking new opportunities. This extends beyond goods, to trade in services (e.g., banking) and intellectual property protection. Although the Russian accession negotiations are in midstream, opportunities still exist for companies willing to push their interests aggressively.
Once a country accedes, it benefits from the full panoply of WTO rights, and existing Members lose the leverage they possessed during the accession process. Thus, governments, industries and companies should carefully examine the economic, commercial and trade regimes of acceding countries to identify market access and other barriers that should be removed as a condition of entry into the WTO.
Trade Remedies: Catch the Wave
After a significant drop in the past few years, there was a resurgence in 2007 in anti-dumping and countervailing duty cases filed by U.S. producers seeking remedial import duties on claimed unfairly low priced and/or subsidized imports. There are several possible reasons for this resurgence.
To begin, for the first time, U.S. authorities accepted in 2007 petitions against government-subsidized imports from China. The U.S. views China as a “non-market” economy. Taking the position that a government subsidy is a departure from a “market economy” situation, the U.S. has historically considered that it could not identify and measure subsidies in a non-market economy environment. Now, however, the U.S. says that, although China is still a non-market economy, there are sufficient market indicators to enable subsidy analysis to proceed. The initial cases found relatively high subsidies. For instance, the U.S. Department of Commerce (DOC) found that bank lending in China is government controlled and often occurs at interest rates below international rates such that there is a subsidy if an exporter has received bank loans. Another example: DOC has calculated substantial benefits through the subsidized provision of land to Chinese manufacturers, using Thailand land prices as a benchmark.
Finally, in 2007, the Chinese government has been eliminating export rebate incentives and even imposing export taxes as to products subject to antidumping and subsidy claims. While such steps may in the long run reduce unfair imports, in the short run they are likely to have the perverse incentive of encouraging more such claims because (a) U.S. producers may be motivated to bring new trade actions against China in hopes of getting such a response and (b) when the Chinese government reduces the attractiveness of exports in this way, Chinese producers sometimes are less interested to defend against trade cases, making it easier for U.S. producers to prevail in such actions.
Historically U.S. producers in unfair trade cases have usually been able to show dumping or subsidies. The amount of dumping found is likely to increase with the recent significant depreciation of the U.S. dollar, making the exporters’ home market prices and/or costs higher in U.S. dollar terms and relative to U.S. prices.
The difficulty, for such producers, in getting relief in recent years, has been showing that a domestic (U.S.) industry was injured by the unfairly traded imports, the other condition for imposing remedial import duties. The U.S. economy and petitioning U.S. producers have generally been doing rather well, too well in many sectors to warrant import relief. The first subsidy case against China resulted in a finding of significant subsidies, but the accused imports took only about 6% of the U.S. market and the U.S. industry was still making over a 10% profit rate. Thus, it was found that the accused imports were not injuring the U.S. industry, and remedial duties were denied on that basis.
But a downturn in the U.S. economy, or in certain segments, may change that situation. Further, 2007 decisions of the U.S. International Trade Commission (ITC) have backed away from a prior view that, if a U.S. industry is making profits, that normally means that it cannot be injured by the accused imports. In 2007, the ITC has placed more weight on finding declining sales as an indication of injury from accused imports even in an industry that is still somewhat profitable. These factors, especially taken together, make it more likely that a U.S. industry can obtain import relief.
The increasingly multinational nature of U.S. industry affects the frequency and composition of unfair trade complaints. But, in many 2007 antidumping cases, one or more of the petitioning U.S. producers has had production facilities in the accused countries (notably China), and yet the petition has been filed, even against imports from one or more of the petitioner’s own foreign production facilities. Apparently a sufficiently profitable U.S. market is more important to such U.S. producers than is any negative impact on their foreign production.
As long as these trends continue, we expect the number of unfair trade petitions to further accelerate in 2008. With several new petitions filed already in the past month, all signs point in that direction.
CFIUS: 2007 Foreign Investment and National Security Act
In last year’s Preview we reported on Congressional efforts in 2006 to tighten the national security review process for foreign acquisitions of U.S. businesses. Since those efforts failed, and the furor over a couple of controversial transactions subsided, we wondered what course the 110th Congress would take. Investors should be relieved, if not pleased, about the course taken. Congress did indeed pass legislation revising the standards and procedures by which the Committee on Foreign Investment in the United States (CFIUS) reviews transactions for national security implications – The Foreign Investment and National Security Act of 2007, PL 110-49, July 26, 2007 (FINSA). To some extent, investors pushed for the legislation in order to clarify the process and prevent CFIUS from over-reacting to Congressional bluster.
FINSA imposes a number of reporting requirements on CFIUS, but from an investor standpoint leaves key current regulatory practices in place. There is no extension of review and investigation periods as had been feared – the review period remains 30 days and the initial investigation period remains 45 days. While transactions involving “critical infrastructure” and state-owned foreign companies should go to an investigation, that determination can be waived by senior administration officials if they deem the second stage not necessary (no threat is posed to U.S. national security by the transaction). Also important, “critical infrastructure” is not defined in the statute, but rather is left to regulatory interpretation by CFIUS. While investors are subject to business risk posed by requirements that transactional information be shared with more Congressional and municipal officials, that risk is somewhat controlled by confidentiality restrictions.
What will 2008 bring? First, regulations are due early in the year. Investors are hoping to see issues such as critical infrastructure, sovereign wealth funds, and mitigation agreements addressed clearly in the regulations. In the meantime, it is clear that transactions involving Chinese, Russian, and Middle Eastern investors, and the energy, infrastructure, transportation, and financial services sectors will draw more scrutiny from the Hill, if not from CFIUS. This scrutiny can be mitigated through early discussions with CFIUS, transparency with Congress to the extent possible, and a good public relations strategy.
Export Control, Sanctions, and Direct Investment
Export Controls and National Security Reviews of Foreign Direct Investment
In 2008, we will see a renewed emphasis on technology transfers by the Committee on Foreign Investment in the United States (CFIUS). This trend began in 2007 and both the State Department’s Directorate of Defense Trade Controls (DDTC) and the Commerce Department’s Bureau of Industry and Security (BIS) have stepped up their level of activity in connection with CFIUS reviews.
During the CFIUS review process, DDTC frequently inquires why a target firm is not registered under the International Traffic in Arms Regulations (ITAR) as a manufacturer, exporter or broker. It also asks foreign acquiring companies for training records and other demonstrations of commitment to compliance with U.S. reexport control rules. DDTC will continue this practice. Similarly, BIS will continue its practice of asking target companies to submit all items for classification; and will likely continue to withdraw such requests when it receives information that a target company has an adequate jurisdiction and classification determination process.
The lessons learned from 2007 are two-fold. First, all parties to an anticipated transaction should complete their trade compliance due diligence long before CFIUS review. This due diligence should focus on technology transfer issues and the means to convince the export control agencies to trust the acquiring company to shape compliance strategies and maintain effective technology control plans. Due diligence should also be performed on target companies in possession of U.S.-controlled technical data. The second lesson is simply that export controls compliant companies are far more likely to obtain CFIUS approval than non-compliant companies.
Continued Focus on Heightened Enforcement and Penalties
Criminal prosecutions experienced a 66% increase from fiscal year 2006 to fiscal year 2007. This upwards trend will continue in 2008 for several reasons. In June of 2007, the Justice Department named Steven Pelak as the National Export Control Coordinator. His role in this newly created position is to train Assistant U.S. Attorneys across the nation on the prosecution of export control cases, and coordinate export control matters of the U.S. Attorney offices and the newly created National Security Division of the Department of Justice. In our experience with him at lectures and in client matters, it is clear that Mr. Pelak has both the mandate and ability to substantially increase the number of criminal cases for export control violations. The ITT Corporation case settled in 2007 at a record-breaking fine of $100 million. Perhaps more important than the fine amount, was that this was the first criminal case against a major defense contractor under the ITAR.
Following its appointment of Mr. Pelak, on October 11, 2007, Justice announced its “National Counter-Proliferation Initiative.” The initiative creates task forces around the country, which include investigators from the Department of Homeland Security, Commerce, and the Federal Bureau of Investigation. These changes have vastly increased the number of public servants investigating and charging export controls and trade sanctions violations. We have recently seen criminal matters that would not have been initiated as recently as 24 months ago.
The stepped-up enforcement focus and resources will also bring substantive changes in the standard of care expected of exporters and reexporters. Three recent criminal actions allege that a false end use statement from a consignee to a U.S. exporter “caused” an illegal export and constituted a false statement to the U.S. Government. The lesson from these cases is that, in 2008 and beyond, compliance personnel must familiarize themselves with enforcement press releases and indictments to gain a full understanding of the risks inherent in export controls and trade sanctions compliance.
In 2008, we will also see how the U.S. Government applies new levels of civil and criminal fines to conduct that occurred before the October 16, 2007, effective date for changes in fine levels under the International Emergency Economic Powers Act Enhancement Act. We believe that in some, but not all, cases, OFAC and BIS will apply the new administrative fine level retroactively at $250,000 per civil violation. For criminal violations, the Justice Department recently acknowledged that it will not seek retroactive application of the new criminal fine levels ($1 million per violation) because such retroactive application would be unconstitutional in the criminal context.
BIS Response to the Deemed Export Advisory Committee Report
In 2008, we will see how BIS reacts to the long-awaited December 20, 2007, report of the Deemed Export Advisory Committee (DEAC). This Report awaits industry and agency response. The recommendations will not become effective unless and until BIS and the reviewing agencies determine to implement them.
The DEAC Report recommends that U.S. firms apply to BIS for a “Trusted Entity” status and, if granted this status, could then make their own determination regarding whether to release technology to a foreign national. It also recommends modification of the current definition of “fundamental research.”
The DEAC Report has the potential for both good and bad policy developments in 2008. Miller & Chevalier will host a seminar on the DEAC Report on February 20, 2008 following initial review of the Report by BIS. This will no doubt be among the most important policy debates of the New Year.
DFARS Amendment and Defense Trade Treaties
Other legislative and agency actions of 2007 expected to result in significant regulatory changes in 2008 include the ratification and implementation of defense trade treaties with the U.K. and Australia and passage of an amendment to the Defense Federal Acquisition Regulations Supplement (DFARS) for export controls compliance.
Following its review of pending Department of State proposals for relevant implementing regulations, the Senate is expected to vote on ratification of the U.S./U.K. and U.S./Australia defense trade treaties. It is expected that these regulations will create amendments to the ITAR similar in the scope of the present exemption for U.S./Canada defense trade transfers.
Also in 2008, government contractors may find express Department of Defense export control compliance requirements under proposed changes to the DFARS. This move comes by way of Section 890 of H.R.1585, National Defense Authorization Act for Fiscal Year 2008, which focuses, among other things, on the prevention of export control violations by requiring export control specific contract clauses and contractor training in corporate export control compliance programs. Although the Bill was vetoed by the President on December 28, it is unclear whether this was by way of a pocket veto or veto subject to Congressional override. Either way, it is likely the new DFARS provision will resurface in 2008.
The Year of the “10 + 2” Blues
The shoe has finally dropped. 2008 began with Customs and Border Protection publishing a notice of proposed rulemaking (73 Fed. Reg. 90 - Jan. 2, 2008) that, if adopted, will require importers and carriers to submit additional information on cargo being shipped to the U.S. before the cargo is loaded onto the vessel. According to Customs, the information required is reasonably necessary to improve its ability to identify high-risk shipments to prevent containers and the cargo they hold from being used to smuggle items that would threaten the safety and security of the country.
Known as “10 + 2” because of the 12 new data elements that will have to be submitted to Customs electronically (10 by importers, 2 by carriers) 24 hours before a ship is loaded, this proposal was floated to the trade community early last year after Congress passed Section 203(b) of the SAFE Port Act in late 2006, which requires CBP to issue regulations requiring the electronic transmission of additional data elements for improved high-risk targeting. Although the trade community raised well-considered concerns and objections to the cost and the “do-ability” of what Customs calls a Security Filing, many of which are addressed in the notice, Customs has generally dismissed them as unfounded.
Interestingly, when OMB reviewed the proposed regulations, it indicated that “data limitations and a lack of complete understanding of the true risks posed by terrorists prevent us [OMB] from establishing the incremental risk reduction attributable to this rule.” In other words, the Government has no idea whether the proposed regulation would make the country safer. OMB also recognized that the regulations could often result in supply chain delays that would result in additional costs to importers. Regrettably, OMB only scratched the surface when analyzing the costs to the business community and did not consider the cost of delays inherent in obtaining the additional information that importers would have to submit, or the fees charged by third parties to transmit the information to Customs.
Currently, the carrier submits “manifest information,” 24 hours before loading, which is extracted from the bill of lading that accompanies each shipment. The ten new data elements that will have to be transmitted to Customs, include information that the carrier does not have:
- Manufacturer (or supplier) name and address
- Seller name and address, unless goods not sold, but then owners name and address
- Buyer name and address, unless goods not sold, but then owners name and address
- Ship to name and address -- first deliver-to party scheduled to receive goods
- Container stuffing location -- name and address(es)
- Consolidator (stuffer) name and address
- Importer of record number/FTZ applicant identification number
- Consignee number(s)
- Country of origin
- HTS number at 6 digit level
Not only do carriers not have these data elements, importers would not want them to have it for business confidentiality and security reasons. Thus, the burden falls on the importer to obtain and transmit the information to Customs, and while Customs proposes to allow an importer to use an agent to file this information, the agent must have access to a Customs-approved electronic data interchange system. This appears reasonable, until one learns that only AMS, the Automated Manifests System, used by carriers, and ABI, Automated Broker Interface, used by customs brokers are now available. Whether a company decides to employ a customs broker(s) for this purpose or chooses to transmit the data itself, neither option is free and the additional costs to importers will be substantial.
This is just an example of the questions and additional costs inherent in the “10 + 2” regulations. In the notice, Customs addresses roughly 40 comments that arose during the past year as it developed this proposal (most unsatisfactorily). However, depending on the size of the importer, its product mix, and the breadth of its sourcing operation, there are certain to be many other questions and concerns that have not been addressed. Written comments on the proposed rule must be submitted no later than March 3, 2008, but it will absorb the business community for the next year or more. The year of the “10 + 2” blues has begun.
U.S. International Trade Commission Continues to be a Forum Of Choice for Resolving International Intellectual Property Disputes
The number of cases filed under Section 337 continues to rise. From a low in 1999 and 2000 of 12 cases each, the number has grown to close to 40 a year, and 15 cases were filed in the last three months of 2007 alone.
The reasons are not hard to find. Section 337 of the U.S. trade laws authorizes the ITC to protect owners of U.S intellectual property rights by, among other things, directing Customs and Border Protection to exclude all further imports of the accused products. In addition to this highly effective remedy, the ITC offers quick relief -- generally within 15 to 18 months (as opposed to the years typical of a trial court); experienced Administrative Law Judges who hear the cases; and the ability to bring multiple, often foreign, respondents before a single forum without jurisdictional or venue disputes.
We think this trend will continue in 2008 as several recent and likely future developments continue to make the ITC a desirable forum.
Downstream remedies. One of the important reasons why complainants like Section 337 actions is the scope of their reach to downstream products. For example, an ITC order directing the exclusion of an integrated circuit may encompass imports of products incorporating that chip, as well as the chip itself. In 2006, the Commission adopted an exclusion order including certain downstream products, even though the value of the infringing chips was quite small compared to the value of the downstream products (20¢ versus several hundred dollars), where the chips were critical components to the downstream products. Just recently the Federal Circuit affirmed this order, albeit without opinion.
In another highly visible decision issued in mid-2007, the Commission ordered exclusion of certain downstream products in a case involving the chips used in cellular telephones. This decision is presently on appeal. If upheld by the Federal Circuit, this decision will confirm that a downstream remedy can be adopted even if it has a widespread potential impact on consumers and third-parties that rely on the infringing product. Watch for the decisions in Kyocera Wireless Corp. v. International Trade Commission and Broadcom Corp. v. International Trade Commission.
Obviousness. In late 2007, the Supreme Court issued its KSR decision, making it harder to obtain and defend a patent against a challenge that the patented invention was “obvious.” While this decision may affect some district courts that have been particularly patent friendly, we predict that it will not much change the pattern of decisions at the ITC. In its first post-KSR decisions, the ITC has affirmed its ALJ’s obviousness analyses. We expect the Commission to continue to follow its past precedent on the subject.
Process patents. Another aspect of ITC law that bears watching in 2008 is the application of exclusion orders to products made outside the United States using a process that is patented in the U.S. Section 271(g) of the U.S. patent law provides such protection. Section 271(g) is generally subject to two exceptions: (1) if the imported items are materially changed before they are imported or (2) they are imported as trivial and non-essential components of another product. However, these two statutory defenses are not available to foreign infringers in Section 337 investigations at the ITC. Several cases pending at the ITC may further test the extent to which the ITC is willing to grant relief in cases involving foreign use of patented processes, and will bear watching in 2008.
GEOs. Finally, another recent trend we predict will continue is the growth in the request for and issuance of so-called General Exclusion Orders (GEOs) by the ITC. GEOs bar all imports of an infringing good, regardless of their point of origin, and regardless of whether they were produced, imported, exported, or distributed by a party named in the action. Once a rare phenomenon, GEOs are now sought in as many as one-half of all Section 337 investigations, particularly in cases involving Chinese respondents. We expect to see more GEOs in 2008.
International Department News
- “Complying with the International Traffic in Arms Regulations (ITAR) in the Invigorated Post-9/11 Enforcement Environment”; January 16, 2008; Hyatt Regency La Jolla at Aventine; San Diego, CA; Speaker: Larry E. Christensen
- “3rd National Forum on Export Enforcement and Investigations”; January 29-30, 2008; L’Enfant Plaza Hotel; Washington, D.C.; Speaker: Mark J. Rochon
- “2nd Advanced Conference on Export Controls: Enhancing Your Global Compliance Policy to Minimize Risks of Sanctions for Inadvertent Violations”; February 4-5, 2008; Jurys Great Russell Street Hotel; London, England; Speaker: Larry E. Christensen
- “IDFA International Sweetener Colloquium”; February 10-13, 2008; Sanibel Harbour Resort & Spa; Fort Myers, FL; Speaker: Jon Huenemann
- The International Bar Association’s “7th Annual International Corporate Counsel Conference”; February 17-19, 2008; Hilton Hotel; Frankfurt am Main, Germany; Speaker: Kathryn Cameron Atkinson
- “International Corporate Compliance”; February 21-22, 2008; Washington, D.C.; Co-Chair: Kathryn Cameron Atkinson and Speaker: Homer E. Moyer, Jr.
- “19th National Conference: Foreign Corrupt Practices Act”; March 26-27, 2008; Bridgewaters - at Historic South Street Seaport; New York, NY; Speakers: Homer E. Moyer, Jr. and John E. Davis
- “Canadian Forum on Bribery and Foreign Corruption”; March 31- April 1, 2008; The Fairmont Royal York; Toronto, Canada; Speaker: Homer E. Moyer, Jr.
- “Fraud and Procurement Contracting: Iraq and Beyond”; April 9, 2008; Washington, D.C.; Conference Co-Chair: Brian A. Hill; Speakers: James G. Tillen and Andrew T. Wise
- “The Foreign Corrupt Practices Act 2008: Coping with Heightened Enforcement Risks”; April 16, 2008; PLI California Center; San Francisco, CA; Speaker: Kathryn Cameron Atkinson
- “The International Bar Association’s 6th Annual Anti-Corruption Conference - The Awakening Giant of Anti-Corruption Enforcement;” April 23-25; Paris, France; Conference Chair and Speaker: Homer E. Moyer, Jr.
In the last 12 months, members of the firm’s International Department have authored or co-authored over 60 client alerts, conference papers, articles, and books. A number of articles focused on recent developments in export controls, trade policy, international intellectual property protection, corporate compliance and anti-corruption.
In early 2007, James G. Tillen, Jeffrey M. Hahn, and Homer E. Moyer, Jr. co-authored the “U.S. Chapter,” and Mr. Moyer edited “The Global Overview,” of Getting the Deal Through: Anti-Corruption in 21 Jurisdictions Worldwide, which was distributed at the 5th Annual IBA Anti-Corruption Conference in Paris, France.
In addition, members were featured in publications such as: Agenda, Bloomberg, Compliance Week, Corporate Counsel, Devices & Diagnostics Letter, Financial Times, Financial Week, Food Chemical News, Foreign Direct Investment, Fulton County Daily Report, Inter-American Dialogue’s Latin America Advisor, International Herald Tribune, Inside Counsel, Inside U.S. Trade, IP Magazine, Latin Business Chronicle, Legal Times, Mergers & Acquisitions Journal, Manufacturing.net, National Law Journal, San Diego Daily Transcript, The American, The Deal, The Hill, The International Lawyer, The Journal of Commerce Online, The Politico, The Recorder, Trade & Forfaiting Review, Wall Street Journal, Washington Business Journal, Washington Lawyer, Washington Post, and Washington Tariff & Trade Letter.