With a Republican Administration now entering the home stretch of its second term and a newly emboldened Democratic controlled Congress forging ahead with its own legislative priorities, 2007 is shaping up to be one of the more challenging years for a host of international trade and regulatory policies and issues. Although the war in Iraq, U.S. efforts to rein in Iranian and North Korean nuclear proliferation, and early presidential politics may dominate this year’s headlines, the coming year will present issues of profound importance to U.S. corporations doing business internationally.
Among issues to watch are the following:
One increasingly controversial topic (with which we have had intimate experience) is the use of independent third-party compliance monitors in corporate FCPA settlements. This practice will continue to be required by the government and will be “front and center” when FCPA and compliance issues arise, as will the debate generated by growing pressure by enforcement officials for corporations to disclose FCPA violations voluntarily.
The shape of international trade issues will be driven by efforts to reach a last ditch deal on the WTO Doha Round, which, along with concluding a number of bilateral FTA negotiations, is at the top of the Administration’s “must do” agenda. Much will depend on whether Congress and the White House can reach common ground on extending the President’s trade promotion authority (TPA) which expires in June. Renewed TPA would bring significant trade legislation, including proposals dealing with U.S. trade with China and long-term competitiveness of the U.S. economy.
Any possible Doha deal to cut agricultural tariffs will generate intense debate on a new five-year Farm Bill. A Doha agreement could also lead to a possible review of U.S. countervailing duty law and its application to subsidized imports from non-market and transitional economy countries.
Notwithstanding much effort made in both the House and Senate in 2006 to reform CFIUS, the interagency process by which foreign investment is reviewed and approved, CFIUS reform may be less of a priority this year in a Congress controlled by Democrats.
The perennial issue of effective enforcement of the intellectual property rights of U.S. corporations -- in particular protection against infringing imports under Section 337 of U.S. Trade Law -- will grow in importance in 2007, thanks in part to a critical U.S. Supreme Court decision last year.
The Administration can be expected to continue to emphasize export controls, customs, and sanctions in its dealings with the Congress and in its own enforcement priorities. Proposals to expand the regulation of exports to China and other countries will command the attention of the business community, and implementation of a new law vesting the Customs and Border Protection agency (CBP) with new power to protect commercial cargo from terrorists -- a new tool in the Administration’s “war on terrorism” -- will affect importers and exporters worldwide.
As we prepare to address these and other issues of urgent concern to our clients, all of us from Miller & Chevalier’s International Department extend our best wishes for the New Year.
Confessions of an Independent Compliance Monitor
Most recent FCPA settlements have required the companies involved to retain an independent third party to evaluate their FCPA compliance programs and oversee enhancements. Over the last 18 months, this practice has generated both commentary and private sector angst. In the year ahead, this use of independent monitors could escalate into a more public controversy.
Originally conceived to avoid the tensions of a continuing post-settlement relationship between enforcement agencies and corporate defendants, third-party consultants or advisors can play a constructive role, even if vested with broad powers. However, having now seen this issue from all sides (we have served as monitor in the largest FCPA case to date, assisted clients in selecting and living with monitors, and represented companies seeking to deal with hostile monitors), we are intimately aware of the multiple risks inherent in the monitor concept.
The use of FCPA monitors has evolved in some ways that are likely to intensify the debate. Some agencies, for example, have recently succumbed to the temptation of not just retaining a veto over the company’s choice of a monitor, but also urging or directing a company to retain a specific monitor, often an alumnus of the enforcing agency. Similarly, settlements requiring independent compliance monitors typically have no provisions for limiting of monitoring costs, which has in a few cases resulted in monitor costs that have rivaled the penalties imposed. And the widely reported resignation of one CEO at the behest of a monitor (not FCPA) has renewed debate on how much authority monitors should be given.
Following a year in which government prosecutors were rebuked for overreaching in demanding waiver of privilege and in pressuring companies not to pay the legal fees of former executives, companies may be emboldened to resist monitors who view themselves more as deputized prosecutors than as independent consultants. While circumstances may occasionally require aggressive oversight, effective monitors will also need to bring good judgment and a sense of proportion when exercising the broad grants of authority conferred upon them.
FCPA: The Self-Disclosure Quandary Intensifies
To make a voluntary disclosure or not: that recurring FCPA question will not become more simple in 2007. Once a question solely within the discretion of a company with an FCPA violation, the issue is now sometimes preempted by Sarbanes-Oxley or the requirements of other securities laws that effectively mandate disclosure. If disclosure is not mandated, the mix of pros and cons that companies now face has become more bedeviling.
Both the exhortations and the soft incentives offered by enforcement agencies have increased. Under the Sentencing Guidelines, self-reporting is cited as an indicator of cooperation, which may help mitigate penalties. Both the SEC, in its Seaboard report and 2006 Financial Penalties Statement standards, and the Department of Justice, in the recently-issued “McNulty Memorandum” on principles of corporate prosecution (which replaced the “Thompson Memorandum”), emphasize voluntary disclosure as a mitigating factor. And in the Justice Department’s most emphatic public pronouncement on the subject, in October 2006 Assistant Attorney General Alice Fisher “strongly encouraged” companies to disclose “serious FCPA issues.” Citing the recent Schnitzer Steel settlement, she stressed that there is “always a benefit to corporate cooperation” and that companies that self-report and otherwise cooperate “will get a real, tangible benefit.” Perhaps a better example, which Fisher did not cite, was last year’s Oil States settlement in which the company fully cooperated and received no financial or criminal penalty.
Notwithstanding such assurances and some supporting empirical evidence, many in the private sector remain skeptical. A recent piece in Forbes magazine made the valid, if overstated, point that FCPA settlements do not show that the benefits of voluntary self-disclosure are certain or predictable. ABB, Inc. was overtly commended for its cooperation but nonetheless given one of the highest FCPA penalties ever imposed. Moreover, the extended delay in resolving FCPA cases, including voluntary disclosures, the resulting long periods of limbo, and the fear of disproportionate penalties are cited as disincentives to disclosure. While always a question of a company’s risk tolerance, some companies, in the absence of a legal obligation to self-report, elect to aggressively correct the problem, impose discipline, and strengthen compliance, but to decide whether to self-report case-by-case.
A reference point, sure to be cited to U.S. enforcement officials, is the new World Bank voluntary disclosure program, which attaches rigorous conditions, but also provides guaranteed and predictable benefits to those that make voluntary disclosures with respect to projects funded by the World Bank.
The Congressional Trade Agenda
The Democratic rise to power augurs a new, more active agenda for trade policy on Capitol Hill. Over the past four years, trade policy legislation has been limited mostly to the implementation of free trade agreements (FTAs), temporary duty suspensions, and the extension of preferential trade arrangements. Looking ahead to the 110th Congress, Democratic leaders have said they want to enact omnibus legislation that links the president’s trade negotiating authority to an array of issues. In particular, key Democrats have expressed a desire to address the U.S. trade balance with China, the long-term “competitiveness” of the domestic economy, and the perceived lack of strong labor and environmental standards in U.S. trade agreements.
Fast Track Negotiating Authority. The President’s current negotiating authority expires at the end of June 2007, and the apparent lack of congressional support for renewal has spread skepticism about the prospects for the WTO’s Doha Round and a host of bilateral FTAs currently in negotiation. Yet, leading Democratic legislators such as Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways and Means Trade Subcommittee Chairman Rep. Sander Levin (D-MI) have linked their support for extension of fast track negotiating authority to improvements in several areas of U.S. trade policy. For example, many members of Congress on both sides of the aisle want to step up enforcement of our trading partners’ compliance with those trade agreements already in force. Senator Baucus also wants to expand Trade Adjustment Assistance and to enact a host of other trade and tax incentives designed to improve the long-term competitiveness of U.S. industry. Rep. Levin and other Democrats, particularly in the House, have insisted that any extension of fast track must be linked to stronger labor and environmental standards in U.S. trade agreements.
U.S.-China Trade. Perhaps more than any other area of U.S. trade, the growing trade deficit with China has provoked intense anxiety in Congress. A Chinese currency peg -- which artificially restrains the strength of the Chinese yuan against the U.S. dollar -- drew much of the U.S. ire. In the 109th Congress, Senators Chuck Schumer (D-NY) and Lindsey Graham (R-SC) introduced a bill to impose a 27.5 percent duty on all Chinese goods. However, the Schumer-Graham bill arguably would have violated U.S. obligations in the WTO. Last September, the two Senators agreed to revise their effort, in collaboration with Senator Baucus and his Republican counterpart, Senator Charles Grassley (R-IA), and to refocus in the 110th Congress on a WTO-compliant bill. The new legislation will likely 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.
Free Trade Agreements. Finally, Congress will decide whether or not to implement several bilateral FTAs, including agreements with Peru, Colombia, and Panama. Congressional criticism, particularly among Democrats, over labor standards has delayed consideration of the Peru and Colombia agreements. Other prospective FTAs -- with South Korea and Malaysia -- would also require attention, though progress in these negotiations has been slow. Finally, Russia’s pending accession to the WTO will require a vote by Congress to grant permanent normal trade relations (PNTR) with the former communist country.
Doha and FTAs: The 2007 U.S. Trade Agenda
Much has been written this year about what it will mean for the trading system if members of the WTO are not able to reach agreement on Doha by spring 2007. There is deep concern that if members are not able to make the important compromises necessary to reach the next level of worldwide tariff liberalization, the system will be irreparably harmed. Despite the general belief that the Doha round is dead, there is continued hope for yet another effort going into reviving the round.
So what are the prospects for Doha? WTO members continue to work behind the scenes to try to reach agreement before “the clock runs out.” It had been generally accepted that the expiration of Trade Promotion Authority (TPA), June 30, 2007, was the magical date. In December, however, Deputy United States Trade Representative John Veroneau, stated that Doha has already missed the TPA deadline because “it is too late” for it to be completed in time to be sent to Congress under the current TPA. The Bush Administration would have to ask Congress for new TPA authority to get any Doha deal through. That decision won’t be made unless a deal is imminent.
On the free trade agreement front, there was a ray of sunshine with the conclusion of the Panama Trade Promotion Authority Agreement in late December, despite the caveat that labor provisions remain to be negotiated. Nevertheless, prospects for other free trade agreements that the United States is currently negotiating are not in much better shape than Doha. While negotiators continue to be publicly optimistic that they will be able to conclude the Korea and Malaysia FTAs, privately they admit that getting these done in order to be considered under TPA (negotiations would have to be concluded by March 31, 2007 ) is almost impossible, particularly with respect to Korea. At the most recent negotiations last month, the Koreans asked for flexibility on the sensitive topic of trade remedy rules, and walked out of pharmaceutical discussions. Moreover, the automotive market access discussions made no progress. Negotiators go back for more with the Koreans and the Malaysians this month. Rounding out the gloomy picture is the likelihood that the Peru, Colombia (and now Panama) trade promotion agreements will have a very tough time getting through, even if labor provisions are modified to meet Democrats’ demands.
NAFTA and U.S.-Mexico Trade Relations: The End of the NAFTA Implementation Road in 2007
The North American Free Trade Agreement (NAFTA) has from its inception inspired political controversy. The year 2007 will be no different, especially in Mexico. At the same time, the potential for the NAFTA to play a more controversial role in the U.S. policymaking process than it has in the most recent years should not be discounted.
The biggest potential cause is agriculture trade. Agriculture trade between the U.S. and Mexico has boomed under the NAFTA to the point where Mexico is the second largest market for U.S. agriculture exports (after Canada) and the U.S. is the largest market for Mexican agriculture exports. Furthermore, Mexico has become such a major market for a broad range of U.S. agriculture products that the economic implications of any significant obstacles to the trade ripple across the U.S. agriculture economy. The same phenomenon exists to a significant degree in Mexico’s agriculture sector.
This year will bring special challenges for agriculture trade between the U.S. and Mexico. On January 1, 2008, all trade between the two countries is scheduled to be tariff free, and this includes politically sensitive agriculture such as sugar, dairy, corn and beans. Mexico is also facing a volatile political environment generally, and elements of the agriculture community in Mexico are adding to this tinderbox. Similarly, the U.S. is heading into a year where the legislative framework for agriculture is up for renewal in the U.S. Congress, and the Congress will also likely be considering a trade legislation package of some kind in light of the President’s expiring authority to implement comprehensive trade agreements among other factors. In short, in both countries this year, there will be much more than the typical amount of interest shown by the agriculture sectors in the domestic and trade policy environment in North America. When the NAFTA was first negotiated the notion of getting to comprehensive tariff free trade between the U.S. and Mexico seemed far off. Now, it is right around the corner and some in the agriculture communities are deeply focused on its implications. How this situation is handled will have implications in North America and around the world.
New Developments In Trade Remedy Law for 2007
Trade Remedies for Chinese Subsidies. Many U.S. industries claim to be seriously injured by subsidized Chinese competition. But, under long-established U.S. Department of Commerce practice, affirmed by the U.S. Court of Appeals for the Federal Circuit in the Georgetown Steel decision, PRC government subsidies are not actionable under U.S. countervailing duty law (which provides remedial offsetting import duties in the case of injurious subsidized imports). In essence, the court upheld Commerce’s reasoning that a “non-market” economy is inherently incapable of having identifiable subsidies. Subsidies are government distortions to a market. But, Commerce and the court reasoned, there is no market benchmark in a controlled (non-market) economy against which to measure a subsidy.
On December 15, 2006, Commerce solicited comments on whether it should change that practice. See 71 Fed. Reg. 75507. This request was precipitated by the recent acceptance of an anti-subsidy petition against products imported from the PRC. The backdrop includes a newly Democratic Congress that is strongly concerned about Chinese subsidies. Commerce, we suspect, has chosen to address the issue again, rather than risk inviting perhaps even stronger Congressional action.
Of course, even if Commerce decides that U.S. countervailing duty law can be applied to a non-market economy, it will have to determine “What is a subsidy?” and “How should it be measured?” if, by definition, government action is pervasive in such an economy and there are no market-determined benchmarks available. Further, since China is deemed a non-market economy for antidumping law purposes, antidumping import duties are now imposed on Chinese merchandise based on the extent to which its price is less than the calculated cost of production and profit based on a deemed comparable market economy. Thus, the question is also raised: Would it be double-counting to impose both antidumping and countervailing duties on PRC products? For all subsidies or just for certain types?
One thing is for sure -- these issues will be hotly debated in 2007 among those with strongly divergent views.
2007 Uranium Enrichment Services Back in the Spotlight in 2007. Another Federal Circuit decision likely to return to the fore in 2007 is the Eurodif decision, holding that enrichment by a foreign company of U.S.-origin uranium, under a contract, is not the production of a good, and thus is outside the purview of U.S. antidumping and countervailing duty laws. Other companies that arguably provide similar processing services are now seeking to claim exemption from the trade remedy laws under this theory. If read broadly, Eurodif could put much foreign production activity outside of the purview of U.S. trade remedy laws. This issue is sure to be hotly debated in 2007.
Some Additional Likely Developments in 2007:
- Apparel & Textiles. A monitoring scheme announced by the Commerce Department for Vietnamese textile and apparel products will likely be up and running during 2007. Plans will also be in the works for addressing the Chinese products that are now under the (supposedly) last round of quotas which end in 2008. Since much of the “best” was saved for last in the quota termination process, this could prove quite contentious.
- NME Antidumping Methodology. The Commerce Department is likely to continue efforts to refine its NME antidumping methodology, both in the context of individual cases and through rulemaking and policy bulletins.
- China-specific Trade Legislation Proposals. Proposals debated by the Congress are likely to include numerous AD/CVD elements.
- Negotiated AD/CVD Reforms. 2007 may see the beginning of serious political consideration of reforms necessary to close the WTO Doha round talks. There is at least a decent chance that changes will be pre-notified to Congress this year under the special 180-day mechanism in the President’s Trade Promotion Authority.
CFIUS Legislation - Is the Reform Movement Over?
In 2006, frustrated with concerns that the Committee on Foreign Investment in the United States was not taking national security threats posed by foreign acquisitions of U.S. companies seriously enough, the House and the Senate passed divergent legislation to reform CFIUS and the foreign investment review process. (We initially reported on the CFIUS reform legislation on April 1, 2006). The Senate version made significant substantive as well as procedural changes, while the House version was more focused on reforming the process. Although the two bodies passed legislation in July, they were unable to set up a conference and pass reform legislation before the 109th Congress ended. Wherever the chips fall in the 110th Congress, foreign investors will have to adjust to a more uncertain investment process and environment. In the recent Alcatel-Lucent merger, despite firm assurances by Alcatel that only U.S. citizens would handle sensitive defense contracts, CFIUS imposed further conditions on the merger that some argue allows the government to unwind the merger at any time.
How did we get to this point? Under CFIUS practice, while hundreds of transactions have undergone the mandatory initial 30-day review stage, the process has ultimately resulted in only eight investigations, and two presidential decisions, including only one divestment order. Arguably, some of those hundreds of transactions should have received a formal investigation, as they likely involved state-owned entities. One of Congress’s primary objectives was to close the so-called “Byrd Amendment loophole” in which CFIUS has not automatically proceeded to an investigation when foreign government ownership is implicated, but rather has done so only when the review period revealed a threat to national security. In the rush to reform, however, Congress has also placed a number of new restrictive provisions that will make the process, at least initially, more uncertain and cumbersome for investors.
An important issue for investors clearly is the time frames involved in this process. Today the process can take 30 to 90 days. Proposed legislation could push that out to at least another 30 to 45 days. A key concern of investors is the requirement of an investigation when a foreign government-controlled entity is involved in a transaction or where there would be foreign control of “critical infrastructure” (regardless of involvement of a government-controlled entity). Given the broad scope afforded this term, “critical infrastructure encompasses most sectors of the U.S. economy: agriculture, food, water, public health, emergency services, information and telecommunications, transportation, banking and finance, chemical industry and hazardous materials, postal and shipping, as well as government and the traditional industrial defense base. Add confidentiality issues pertaining to oversight reports to Congress to these concerns, and the investment community has reason to be concerned. At this point, it is too early to tell whether CFIUS reform is a priority for the new Congress.
Commerce Department’s China “Catch-All” Rule Not Likely to Disappear
Despite rumors that it might die a slow death, the Commerce Department’s so-called “China Military Catch-All” rule is still very much alive. Originally published in proposed form in July 2006, the rule continues to be the target of significant debate and criticism. As proposed, the rule does not specifically target China, and Commerce officials assert that it is not truly a “catch-all” rule. That said, if adopted in its present form, the new rule would dramatically expand certain aspects of the Export Administration Regulations and add significant compliance burdens and risks with respect to exports to China.
Commerce Department officials have been traveling widely to promote the rule in the face of arguments from industry that it is not likely to fulfill its stated goal of benefiting national security and instead would harm trade. Commerce held five chartered sessions across the country during the public comment period in the fall of 2006 in an effort to muster support for the proposed rule. Newly-confirmed Assistant Secretary for Export Administration Chris Padilla has devoted significant time and energy in support of this effort.
Stressing what Commerce views as the narrowness of the proposed rule, Assistant Secretary Padilla has indicated that the final rule will likely look much like the proposed rule and that any comments should focus on how to make the process work rather than on convincing Commerce to drop the rule. According to Padilla, the proposed rule has the support of top-level Bush Administration officials and is a reflection of overall U.S. foreign policy toward China. Specifically, the Administration is concerned that civilian technology is being shared with and used by the Chinese military in ways that undermine the longstanding U.S. arms embargo against China.
In 2007, U.S. exporters should expect to see some version of the rule become law. Significant issues regarding scope and implementation remain, however, including uncertainty regarding the validated end-user (VEU) system and how Commerce will determine what makes a “material contribution” to the military capabilities of China. We will continue to monitor these issues and keep clients apprised.
New U.N. Sanctions Against Iran: Too Little, Too Late?
On December 23, 2006, the United Nations Security Council unanimously passed Resolution 1737, which imposes trade sanctions against Iran in response to its uranium-enrichment activities. In addition to the sanctions, which we explore in more detail below, the resolution calls on the International Atomic Energy Agency (IAEA) to report to the Security Council on Iran’s compliance with the resolution and threatens “further appropriate measures” in the event that Iran has not suspended uranium enrichment activities within the designated time period. Thus, while the recently imposed measures are limited in scope, the resolution does open the door to additional sanctions.
Pursuant to Resolution 1737, States are prohibited from trading with Iran -- directly or indirectly -- in materials, equipment, goods or technology that could contribute to the country’s nuclear enrichment activities or to the development of nuclear weapons delivery systems. In addition, States are required to prevent the provision to Iran of any technical assistance or training, financial assistance, investment, brokering or other services, or the transfer of financial resources or services related to the supply, sale, transfer, manufacture or use of the prohibited items, materials, equipment, goods and technology. The resolution also includes a list of persons and entities involved with Iran’s nuclear and ballistic missile programs. States are required to freeze the financial assets of the designated persons.
These new sanctions are the culmination of a long-running effort by the United States and several of its trading partners to impose aggressive multilateral sanctions in response to Iran’s suspected nuclear weapons activities. In virtually every respect, existing U.S. sanctions and trade controls already prohibit the activities targeted by the resolution. Thus, the notable feature of the U.N. sanctions is their multilateral nature, although, due to jockeying within the Security Council, the measures are far more limited than the United States was originally seeking. Again, while the recent sanctions are limited in scope, they call for a report from the IAEA within 60 days on whether Iran has suspended uranium enrichment activities, and if Iran is not compliant within the aforementioned timeframe, broader sanctions may be a possibility.
CBP Will React to SAFE Port Act in 2007
In 2007, U.S. Customs and Border Protection will grapple with implementation of the Security and Accountability for Every Port Act of 2006, also known as the “SAFE Port Act.” In passing the Act, Congress intended to protect commercial cargo from terrorist infiltration without placing unrealistic burdens on the importing community. CBP will face a busy year implementing the requirements of this law.
First, the Act requires CBP to adapt and further develop the Customs-Trade Partnership Against Terrorism (C-TPAT). Although C-TPAT will remain a voluntary program, the new law codifies the minimum security requirements for participation, directs CBP to update those requirements at least annually, and requires CBP to develop procedures for the revocation of C-TPAT benefits in cases where participants fail to comply with the requirements. Additionally, while the Act codifies CBP’s current three-tiered system of participation already in effect, it also defines the minimum requirements and benefits corresponding to each tier. The new law also requires CBP to re-validate Tier 2 and Tier 3 participants every four years, and CBP will begin the process of planning for the re-validations of the several thousand companies that have already been validated. Finally, CBP is required to create a one-year pilot program to evaluate the feasibility of using approved third parties to conduct validations. Industry has generally opposed the use of third party validators based on concerns about confidentiality, so the results of this experiment should be instructive.
Second, the Act will require CBP to adopt new programs and standards in 2007 for scanning merchandise destined for the United States -- either abroad or in domestic ports. For example, the law requires three foreign seaports to be designated for a pilot integrated scanning system involving both nonintrusive imaging equipment and radiation detection equipment. Domestically, by the end of 2007, CBP is required to scan all cargo entering the United States through the 22 highest-volume seaports for radiation at the port of entry. CBP must also develop and implement a plan within the next year for selecting containers for inspection at random, in addition to any targeted inspections.
Third, the new law directs CBP to promulgate regulations requiring the electronic transmission of additional data elements for improved high-risk targeting, prior to loading of U.S.-bound cargo on vessels at foreign seaports. In considering the feasibility of various options for the additional data to be required, CBP must consult with stakeholders, including the Commercial Operations Advisory Committee (COAC). CBP has already announced that it will be publishing a proposal in the Federal Register shortly to require such additional information -- often referred to as “10 + 2.” Under the “10 + 2” proposal, importers will be required to submit 10 new data elements (carriers will file an additional two data elements) to CBP at least 24 hours before cargo is loaded onto an ocean carrier. Currently, the carrier is responsible for transmitting certain advance information to CBP, but the information CBP will be requiring is commercial and business information that most importers are loathe to share with their carriers. Thus, importers would have to transmit the additional 10 data elements to CBP directly. However, at this point, CBP has not explained how the new data set would be linked to the information transmitted by the carrier, or, for example, the consequences of CBP not receiving the information in a timely fashion or receiving information that is incomplete or erroneous. This proposal will have to be carefully and thoughtfully considered by all parties involved in the supply chain because it has the potential of adding additional unacceptable costs and risks to the import process.
Has Congress Breathed New Life into CBP’s Commercial Responsibilities?
At this time last year, we speculated that the pendulum at U.S. Customs and Border Protection was about to swing away from security and back toward commercial compliance and enforcement. We were somewhat premature in our assessment, but not far off. During the past year, there has been a growing recognition in Congress that CBP has been neglecting its revenue collection and protection responsibilities. Thus, when the SAFE Port Act was being considered last year, Senators Grassley (R-IA) and Baucus (D-MT) insisted that the legislation address this shortcoming. The new law included a provision that established within CBP a new Office of International Trade (OT), merging the Offices of Strategic Trade, Regulations and Rulings, and portions of Field Operations into the new entity.
Headed by Assistant Commissioner Dan Baldwin, OT consists of four major divisions: Commercial Targeting and Enforcement, headed by Vera Adams; Trade Policy and Programs, headed by Anne Maracich; Regulatory Audit, headed by Cindy Covell; and Regulations and Rulings, headed by Sandra Bell.
The new Commercial Targeting and Enforcement Office will be responsible for (1) risk assessment and targeting, i.e., identifying high risk shipments and non-compliant companies, and developing traderelated targeting models; (2) performance measurement, i.e., developing compliance measurement programs and analyzing the effectiveness of targeting models; (3) commercial penalties and seizures, i.e., evaluating penalty and seizure policies from the perspective of whether they are achieving the goal of improved importer compliance; and (4) trade data, i.e., the single source of such data within CBP.
The new Trade Policy Office will be responsible for developing national trade strategies, including the selection of products or areas in which CBP should be directing its enforcement efforts -- such as textiles and other quota-class merchandise, intellectual property rights protection, antidumping and countervailing duties, agriculture, and tariff preference claims. The Office will also focus on how to improve commercial compliance and will be responsible for the Importer Self Assessment program (ISA), which was previously overseen by the Regulatory Audit office. The Trade Policy Office will review existing benefits offered to ISA members and other importers who are viewed as compliant.
There will be little change in the responsibilities of the Regulatory Audit Office and the Office of Regulations and Rulings. The former will continue to handle post-entry audits generated through internal risk analysis or referrals from import specialists, and the latter will continue to be responsible for issuing interpretative rulings, drafting regulations, preparing informed compliance publications, and deciding significant penalty cases.
According to Assistant Commissioner Baldwin -- a former auditor and an ardent believer in post-entry verification -- by placing the responsibilities for commercial compliance and enforcement of Strategic Trade, Regulations and Rulings, and Field Operations into this new organization, CBP’s targeting and use of auditing resources will be improved, and this should result in greater reliance on audits rather than on cargo inspections. It should also result in more audits, more productive audits and enhanced compliance of the customs and related laws.
Whether this organizational reshuffling will result in more vigorous enforcement of the Customs commercial requirements should become apparent in the next six months. Importers that may have grown lax in their compliance efforts over the past several years because they perceived that CBP cared primarily about supply chain security should take heed of this renewed interest in commercial compliance and enforcement, and should review their internal controls over their customs operations. Waiting for an audit notification letter could prove costly.
Supreme Court Gives Section 337 Even More Bite
A 2006 U.S. Supreme Court decision is likely to make Section 337 an even more popular forum for intellectual property owners in 2007. Section 337 is a provision of U.S. trade law that provides an important mechanism for U.S. enforcement of IP rights against infringing imports. It authorizes an unfair trade investigation before the U.S. International Trade Commission (ITC), and provides a fast-paced alternative to district court litigation. Cases typically are resolved within 12 to 15 months, and the primary relief is in the form of an exclusion order barring all infringing imports, which is enforced at the border by Customs and Border Protection.
The past few years have witnessed a dramatic rise in the number of Section 337 complaints filed at the ITC. Twelve cases were filed in each of 1999 and in 2000. Since then the number of new cases filed each year has more than doubled, with 41 new petitions filed in fiscal 2006. The ITC is now handling an all time high of some 70 active cases, reflecting both the importance of IP in today’s economy and the significant potential advantages of Section 337 rather than a district court case for many companies with IP rights in the United States.
The U.S. Supreme Court added to those advantages last year when it tightened the legal standard for issuance of an injunction against a patent infringer in its eBay, Inc. v. MercExchange decision. The Court held that a successful plaintiff in a patent infringement case is not presumptively entitled to an injunction against future infringement. Rather, the plaintiff must demonstrate, as for any equitable injunction: “(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.”
The district court decisions issued since the e-Bay decision suggest that it will be much more difficult to obtain an injunction from the U.S. courts in light of the Supreme Court’s decision. For example, an injunction was denied in the first two post-eBay decisions to address the issue -z4 Technologies Inc. v. Microsoft Corp. and Finisar Corp. v. The DirecTV Group Inc. Interestingly, both decisions were from the popular rocket docket in the Eastern District of Texas. A coolness toward injunctive relief could dampen interest in that venue on the part of patent owners.
In contrast to this new state of law, the primary remedy in a Section 337 case -- as noted, an exclusion order enforced by Customs -- is necessarily injunctive in nature. If the petitioner in a Section 337 case prevails, it will at a minimum be entitled to preclude all further imports of the product into the United States. Thus, Section 337 could quickly become the forum of choice for companies for whom injunctive relief is important and the infringing product is imported.
International Department News
- “National Forum on Complying with Export Controls on International Technology Transfers”; January 24, 2007; San Francisco, California; Co-Chair and Speaker: Josephine Aiello LeBeau.
- “Following the Money: Strategies and New Developments in FCPA and Anti-Money Laundering Compliance”; January 29, 2007; The Yale Club; New York, New York; Speakers: Leigh A. Bacon, James G. Tillen.
- “International Trade Update”; February 1, 2007; Georgetown University Law Center Hart Auditorium; Washington, DC; Panel Moderator: Greg Mastel.
- “Asia Business Conference”; February 10, 2007; Harvard Business School; Boston, Massachusetts; Speaker: Greg Mastel.
- “International Dairy Foods Association’s International Sweetener Colloquium”; February 11-14, 2007; Hilton Tucson El Conquistador; Tucson, Arizona; Panelist: Jon Huenemann.
- “International Corporate Compliance”; February 22, 2007; The Fairmont Chicago Hotel; Chicago, Illinois; Program Co-Chair: Kathryn Atkinson; Other Speakers: Homer
Moyer, Jr., Lisa Prager, Mary Lou Soller.
- “American Petroleum Institute’s Annual Petroleum Drawback/FTZ/Import Seminar”; March 18-20, 2007; Embassy Suites Hotel; Alexandria, Virginia; Speaker: Sarah Nappi.
- “Doha Development Agenda and the WTO”; March 21, 2007; University of California, Berkeley School of Law; Berkeley, California; Speaker: Jon Huenemann.
- “ACI’s 17th National Conference on the Foreign Corrupt Practices Act”; March 27-28, 2007; The Waldorf Astoria; New York, New York; Conference Chair: Homer E. Moyer, Jr.; Speaker: John E. Davis.
- “ABA Section of International Law Spring Meeting”; May 3, 2007; Washington, DC; CFIUS Panel Chair: Mélida Hodgson.
- “ABA Section of International Law Spring Meeting”; May 3, 2007; Washington, DC; FTA Panel Chair: Mélida Hodgson.
- “The International Bar Association’s 5th Annual Anti-Corruption Conference: The Awakening Giant of Anti-Corruption Enforcement”; May 3-4, 2007; Paris, France; Conference Chair : Homer E. Moyer, Jr.; Speaker and Workshop Leader: Kate Atkinson.
- “10th National Forum on Export Controls Global Compliance Strategies”; May 15-16, 2007; Washington, DC; Co-Chair: William M. McGlone; Speaker: Josephine Aiello LeBeau.
In the last 12 months, members of the firm’s International Department have authored or co-authored approximately 85 client alerts, conference papers, articles, and books. This includes the winter 2006 edition of the Washington Legal Foundation’s Conversations With . . . The Honorable Dick Thornburgh, Paul A. Volcker and Homer E. Moyer, Jr., a member of Miller & Chevalier. The article examined international corruption in the context of business activity, with a focus on the Foreign Corrupt Practices Act and anti-corruption efforts at international organizations. View the article here.
In mid-2006, member Hal Shapiro published the book FAST TRACK: A Legal, Historical, and Political Analysis. The book argues that the time has come for the United States to end its perennial debate over the process by which we approve international trade agreements i.e., whether to resort to fast track or not and begin a debate on how best to prepare American citizens to compete in a globalized world. Shapiro also published the commentary piece “Fast Track to Nowhere” on Forbes.com, located online here.
In addition, members were featured in such publications as Challenge, Clinica, Director’s Monthly, Financial Times, Global Intellectual Property Asset Management Report, Government Contractor, The Hill, The International Economy, International Government Contractor, BNA’s International Trade Reporter, Journal of Commerce, The Lawdragon 500 Leading Lawyers in America, Legal Times, Metropolitan Corporate Counsel, The National Association of Corporate Directors, North American Free Trade & Investment Report, and World Trade Executive.