The Senate confirmed Robert Lighthizer as the US Trade Representative (USTR) on Thursday. The USTR is a Cabinet position, and thus Lighthizer will now serve as President Trump’s top trade negotiator.

The Senate confirmed Lighthizer with support from both Republicans and Democrats. The 82-14 vote followed months of delays prior to his confirmation.

In order to serve as USTR, Congress had to first pass a waiver to confirm him. Section 141 of the Trade Act of 1974 bars anyone who has “directly represented, aided or advised a foreign entity … in any trade negotiation, or trade dispute” from serving as USTR or Deputy USTR. In the mid-1980s Lighthizer represented Brazil in a trade dispute over ethanol with the US, and in the early 1990s he represented an electronics trade group linked to the Chinese government.

The Senate Finance Committee approved a waiver of this restriction, and the waiver passed the House and Senate and was signed into law on May 5, 2017. The confirmation of Lighthizer means that the administration can now begin the formal process to begin renegotiating the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico, as well as moving forward with other trade deals.

 

In a recently filed complaint, battery giant Duracell brought Lanham Act claims against wholesaler JRS Ventures, Inc. (JRS) for importing and reselling batteries bearing the Duracell’s iconic “copper top” mark.  The wrinkle, as is the case in all “gray market goods” (or “parallel import”) cases is that the batteries are genuine Duracell batteries, produced with Duracell’s authorization in China.  Duracell, however, intended to sell the batteries to electronics manufacturers to be included with remote controls and other devices that come out of the box with batteries already installed, not to US consumers at retail stores.

Copyright: rakim / 123RF Stock Photo
Copyright: rakim / 123RF Stock Photo

The goods are “gray market” because they are not stolen goods or counterfeits.  They are however, being sold in a manner that intellectual property owner did not intend.  At its root,  the gray market grows out of a tension between the need to protect the intellectual property inherent in a product and the need to promote free trade of physical goods without the strings of lingering ownership rights.

Generally, the first sale doctrine operates to sever intellectual property rights when a good reaches the market and is sold.  For example, once you buy a DVD containing a copyrighted movie you can sell that DVD or give it away, you own the physical DVD.  You cannot, however, make copies of the content, because the copyright owner still controls the artistic expression that is the film.

First sales in different countries, however, make the gray market even grayer.  Where goods are sold outside the US, US intellectual property holders can use their ownership rights to stop unauthorized goods at the border if those goods are “materially different” from the goods offered to consumers within the US.  In recent years, world-wide producers have taken increased steps to insure that the packaging, instructions, and warranties offered with their products around the world differ so that they can meet the “materially different” standard and stop importation of gray market goods. Critics argue that being able to use intellectual property rights to control importation allows corporations to manipulate prices around the world by keeping goods (at their set individual market price) where suppliers want them.  In the context of pharmaceuticals, which may be donated to developing countries but which sell at a significant cost in more developed countries, the debate about uninhibited trade is an interesting one.

To prevail on its Lanham Act claims, Duracell must demonstrate that the goods are materially different.  As a key material difference, Duracell has argued that the warranty it offers to US consumers is ten times longer than the warranty offered on the batteries sold to electronics manufacturers.

In addition to the Lanham Act, however, one of the strongest mechanisms for fighting the importation of gray market goods comes from contract law.  Gray market goods are often a product of global supply chains in which original producers lose contact with the goods before a ‘genuine’ sale on the market.  Therefore, contracts throughout the supply chain should contain provisions requiring that downstream distributors report and account for all goods and, potentially, impose indemnification or other liability if those goods end up somewhere that the producer did not intend.

From distribution and supply chain contracts to Lanham Act litigation, any producer who sells products abroad should be prepared for the day when their own goods start appearing the domestic market and should take steps now to make sure that they prevail.

On Monday, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) leveled one of the largest sanctions actions in OFAC’s history. OFAC sanctioned 271 employees of Syria’s Scientific Studies and Research Center (“SSRC”).

According to OFAC, the SSRC is responsible for developing chemical weapons that were used against civilians by Syrian government forces earlier this month in Khan Sheikhoun, Syria. OFAC has stated that these 271 designated individuals are scientists who have expertise in chemistry and related scientific disciplines and have supported the SSRC program since at least 2012. OFAC has stated that these individuals are working on developing chemical weapons for Syrian President Bashar Assad.

Because of the sanctions, U.S. persons are now generally prohibited from conducting business with these designated individuals. Any property or interest in property of the 271 individuals in the possession or control of U.S. persons or within the United States must be blocked. Additionally, U.S. banks have been ordered to freeze the assets of any employees that have been named.

The sanctions more than double the number of individuals and entities sanctioned by the United States pursuant to Syria-related Executive Orders.  These sanctions are intended to hold the Assad regime and those who support it accountable for the regime’s violations of the Chemical Weapons Convention and UN Security Council Resolution 2118.

 

Copyright: bedo / 123RF Stock Photo
Copyright: bedo / 123RF Stock Photo

In a complaint recently filed in Delaware Chancery Court, a shareholder of General Cable Corp. (“General Cable”) has asked the Court to compel the release of documents related to General Cable’s $82 million settlement of claims under the Foreign Corrupt Practices Act (FCPA).

In January, General Cable, a Kentucky-based industrial cable manufacturer, agreed to the $82 million settlement with the US Department of Justice and the US Securities and Exchange Commission. The DOJ and SEC alleged that between 2002 and 2013 General Cable paid approximately $13 million in bribes to secure more than $50 million in contracts in Africa and Asia.  General Cable’s penalties were reduced based its voluntary disclosure of the payments and the SEC noted that there was no evidence of personal misconduct by the former CEO and CFO who had already returned millions in compensation.

In the recent shareholder complaint, the shareholder alleges that he has been improperly denied access to corporate records regarding the investigation and settlement of the FCPA claims.  The shareholder previously requested, and was provided, board meeting transcripts and materials from 2011 to 2015.  The shareholder alleges that General Cable has refused his subsequent requests, including requests for internal audit reports, emails, and other document related to the improper payments and the settlement with authorities.  The shareholder asserts that the documents are necessary to evaluate potential steps to improve corporate governance.

Potential shareholder litigation is yet more collateral damage extending from FCPA violations.  Should the shareholder be successful, there may be significant new precedent as to what investigative and settlement documents a shareholder has the right to review.  Well documented compliance policies and education remain the best way to avoid FCPA violations and the ancillary challenges that so often follow.

 

In a recent enforcement action, the Treasury Department’s Office of Foreign Assets Control (OFAC), took what appears to be an unprecedented step in finding that a Taiwanese shipping company had violated the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR).

Copyright: 1971yes / 123RF Stock Photo
Copyright: 1971yes / 123RF Stock Photo

The alleged violation surrounds a ship-to-ship transfer of oil between a vessel owned by B Whale Corp. (BWC), a subsidiary of TMT Group (TMT), and a vessel owned by the National Iranian Tanker Co., which is listed as a specially designated national (SDN).  BWC and TMT maintain that the transaction involved oil originating in the United Arab Emirates and was conducted by subcontractors who were contractually prohibited from dealing with SDNs.  Nevertheless, OFAC determined that by turning off vessel identification systems and using circuitous routes, the BWC vessel had taken efforts to conceal its actions and the origin of the oil.

The novel issue here, is how OFAC came to assert jurisdiction over BWC and TMT to make its finding.  In 2013, TMT brought a voluntary bankruptcy proceeding in the Southern District of Texas, seeking protection from US creditors.  The allegedly improper oil transfer occurred after the bankruptcy proceeding had commenced.  During that proceeding, there was a motion by TMT’s creditors to remove TMT’s management due to “fraud or dishonesty” under the Bankruptcy Code.  Shortly thereafter,  OFAC conducted its investigation and asserted that it had jurisdiction,  because “BWC was a U.S. person within the scope of the ITSR because it was present in the United States for the bankruptcy proceedings when the transaction occurred.” Further OFAC determined that the vessel “was subject to U.S. sanctions regulations because it was property under the jurisdiction of a U.S. bankruptcy court, and therefore the oil transferred to the vessel was an importation from Iran to the United States as defined in the ITSR.”

With the issuance of an enforcement action against a non-US company, there is concern among foreign companies that OFAC is pushing the bounds of its jurisdiction.  OFAC’s two statements regarding the basis for jurisdiction, however, permit contrasting views of OFAC’s intent and the what this decision means for the future of sanctions enforcement. On one hand, the first statement, that BWC was a US person “because it was present in the United States for the bankruptcy proceeding,” rightfully gives reason for pause as mere presence in the United States as a basis for jurisdiction would signal a massive expansion of OFAC’s understanding of its jurisdiction.  On the other hand, the second statement, that the vessel came under the jurisdiction of the bankruptcy court, may, however, circumscribe the impact of this enforcement action.  With this qualification, it is not the mere presence of the foreign company before a US Court which conferred jurisdiction, but the well established principal that assets of the debtor — regardless of location — fall under the jurisdiction of the bankruptcy court.  While any expansion of jurisdiction is concerning to foreign companies and the US companies who transact with them, this assertion of jurisdiction may well be limited to a foreign company that availed itself of US bankruptcy protection and then used its assets for an unlawful purpose.   Should OFAC find other means of extending its jurisdictional reach, however, a new era of enforcement may be beginning.

 

Earlier today, the Department of Justice announced that construction conglomerate Odebrecht SA and its affiliate Braskem SA have pleaded guilty to their maintenance of an elaborate bribery scheme which paid out approximately $788 million in bribes to government officials around the world since 2001.

To facilitate its massive bribery scheme, Odebrecht established its “Division of Structured Operations,” which federal prosecutors dubbed the “Department of Bribery.” The Division of Structured Operations operated on its own floor and used its own communication and computer networks. Code names and secure emails were used by those requesting bribes, bribe recipients, and financial institutions to make payments out of a ‘shadow budget.’ The shadow budget, which accounted for and tracked all bribe payments in complex spreadsheets, was comprised of funds funneled by Odebrecht into off-shore entities and then back into the Division of Structure Operations.

Under their respective plea agreements, Odebrecht and Braskem agreed to pay, at least, a combined $3.5 billion in penalties.  Odebrecht agreed with the DOJ that $4.5 billion would be an appropriate criminal fine, but has claimed that is unable to pay a fine of that amount.  Accordingly, the plea agreement states that Odebrecht will pay at least $2.6 billion, however, an ongoing review of Odebrecht’s ability to pay may result in Oberbrecht paying an amount closer to $4.5 billion. Braskem will pay approximately $957 million in criminal fines.  Brazil, where both of the companies are headquartered, will receive 80% of the fines and the United States and Switzerland will each receive 10%.  Notably, Oderbrecht was credited with 25% reduction in the fine sought based on its cooperation with investigators. Braskem was credited with a 15% reduction based on its partial cooperation.

This blockbuster plea agreement highlights the growing trend of global enforcement. While few companies will ever consider implementing a bribery scheme of the magnitude Odebrecht’s, even small acts to grease the wheels create a slippery slope and companies of all sizes must take precautions — through compliance and training programs — to make sure that a culture where bribery is condoned and supported never begins to gain momentum.

The 15-member U.N. Security Council (the Council) imposed new sanctions on North Korea (also known as the Democratic People’s Republic of Korea or DPRK) on November 30, 2016 by unanimously approving a resolution imposing new sanctions — UN Security Council Resolution (UNSCR) 2321.

55833041 - north korea flag

The resolution is a clear response to North Korea carrying out its fifth and largest nuclear test so far in September 2016. The resolution tighten the sanctions adopted by the Council in March 2016 and is aimed at cutting North Korea’s hard currency that it uses to fund its prohibited weapons programs.

The sanctions impose a cap on coal exports, which is North Korea’s chief source of hard currency and constitutes about one third of North Korea’s export revenue. Pursuant to the resolution, North Korea can sell no more than 7.5 million metric tons of coal a year, or bring in no more than $400 million in sales, whichever comes first. In addition to restricting the export of coal, the resolution also bans North Korean copper, nickel, silver and zinc exports.

Two of the five permanent members of the Council, China and the United States, have been working together to pass the resolution. China is North Korea’s principal patron and coal customer. China’s permanent representative to the United Nations, Liu Jieyi, called on North Korea to halt its nuclear tests. He said the resolution demonstrated “the uniform stance of the international community.”

The U.S. Ambassador to the United Nations, Samantha Power, said that “the United States recognizes that China is working closely with us.” Power stated that “[n]o resolution in New York will likely, tomorrow, persuade Pyongyang to cease its relentless pursuit of nuclear weapons. But this resolution imposes unprecedented costs on the DPRK regime for defying this council’s demands.”

The resolution also requires countries to tell the United Nations how much North Korean coal they are buying and expands the list of banned items for import by North Korea, including luxury goods like rugs and tapestries valued over $500 and porcelain and bone china worth more than $100.

In addition to other export controls, the resolution also imposes banking restrictions and transportation restrictions. The resolution includes an expanded list of individuals and entities that are subject to travel bans and asset freezes, including North Korea’s ambassadors and envoys to Egypt, Sudan, Syria and Myanmar.

On December 2, 2016, the US Treasury Department’s Office of Foreign Assets Control announced related sanctions designations of additional individuals and entities with ties to the Government of North Korea or its nuclear and weapons proliferation efforts, and aircrafts blocked as property of a designated entity.

North Korea has been under United Nations sanctions since 2006 over its nuclear and ballistic missile tests. For United States businesses the resolution does not significantly change the status quo, as US law already prohibits nearly all activity involving North Korea. The resolution will primarily impact areas where North Korea has a strong international presence, including banking, transportation and commodities trade.

US President-elect Trump has promised to abandon the Trans-Pacific Partnership (TPP) trade deal as soon as he takes office. Trump has promised to leave the TPP, which took the Obama administration seven years to negotiate, and instead “negotiate fair bilateral trade deals that bring jobs and industry back on to American shores.”

The TPP is an agreement between 12 nations reached in October, 2015. The TPP sets forth a comprehensive trade framework covering goods and services, cross-border investments, intellectual property, the environment and many other topics of critical importance to companies engaged in international trade. The TPP aims to deepen economic ties between the member nations, cut tariffs and foster trade to boost economic growth.

The member nations are the US, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

64836950 - trans-pacific partnership concept, 3d rendering isolated on white background

 

The text of the TPP still has to be signed and then ratified by all 12 signatories and then implemented by the individual nations’ legislatures. To take effect, the deal has to be ratified by February 2018 by at least six countries that account for 85% of the group’s economic output. This means that Japan and the US will need to be on board.

Earlier this month the TPP cleared its main hurdle in Japan’s parliament, but approval by the US is much less certain. It is likely that after the transition from President Obama to President-elect Trump, the US will no longer continue to work toward implementing the TPP.

Click here to learn more about the TPP.

UK-Based biopharmaceutical company AstraZeneca agreed to pay the U.S. Securities and Exchange Commission (SEC) $5.5 million to settle claims that its Chinese and Russian subsidiaries had made improper payments to state-controlled health care providers in violation of the Foreign Corrupt Practices Act (FCPA).

In an order released earlier this week, the SEC outlined both the claims against AstraZeneca and the company’s cooperative and remedial efforts which were taken into account as part of the settlement.

Between 2007 and 2010 in China, sales staff made payments and gave gifts to physicians and administrators to ensure that state-owned health care providers would purchase AstraZeneca products. In one scheme described in the SEC Order, Chinese sales staff paid individuals for their appearance at fabricated speaking engagements. The conduct in Russia occurred between 2005 and 2010 and similarly paid members of state-owned health care providers to use AstraZeneca products.

AstraZeneca did not self-report its violations; however, it was still able to work toward a settlement based on its cooperation with the SEC. The SEC specifically noted that AstraZeneca disclosed documents and information collected during its own internal investigation including translations of key documents. The SEC also cited AstraZeneca’s remedial efforts including creation of a centralized compliance program with key compliance individuals placed in high-risk markets. AstraZeneca also took appropriate steps with regard to the employees involved ranging from trainings and reassignment to lower-risk areas of responsibility to voluntary separations and dismissals.

Yet again, full and complete cooperation appears to be the key to forging settlement of FCPA claims. Even after failing to self-report, the SEC lauded AstraZeneca’s cooperation and the information that the company’s internal investigation provided which would not have been discernable without the company’s assistance. In addition, the SEC recounted the numerous remedial steps that AstraZeneca undertook. If a company does not have the capacity to guide its own internal investigation or plan and implement remedial measures, it should contact a law firm that has the knowledge and resources to help the company make meaningful contributions to the investigation of any claims that arise.

AstraZeneca will pay $5.5M to the Securities and Exchange Commission to settle claims that it violated the Foreign Corrupt Practices Act by making improper payments to state controlled health care providers in China and Russia.

Background

The SEC complaint provides that the staff of AstraZeneca’s foreign
subsidiaries bribed health care providers in China and Russia with cash and 123rf.comgifts to persuade them to purchase products from the company.   In addition, the SEC stated that AstraZeneca lacked proper internal accounting controls over the relations of its China and Russia subsidiaries and government officials and falsely recorded the improper payments as “bona fide business expenses” in its financial statements.  The SEC added that AstraZeneca did not track employee reimbursements or speaker fees, gifts, travel and entertainment, and did not enforce its corporate policy against improper payments to government officials in China and Russia.  It also did not provide adequate FCPA training to sales staff who regularly interacted with local officials in the health care industry, according to the SEC.

The SEC indicates that AstraZeneca has taken steps to become compliant with the Foreign Corrupt Practices Act by providing anti-corruption training and revamping its internal controls and procedures.

Implications for U.S. Companies that do Business Abroad

AstraZeneca’s settlement and the $5.5M payment that it must make emphasizes the importance of FCPA compliance by U.S. companies that do business abroad.  The line between proper and improper payments, gifts, travel and entertainment expenses to foreign officials under the FCPA can be difficult to draw by company staff without proper training.  Doing business in countries where the level of corruption is high, such as Russia and China, can make FCPA compliance especially challenging.

As such, it is key for U.S. companies to have robust FCPA compliance programs and audit testing, to provide careful due diligence for particular transactions and relationships, to keep proper records, and to promptly respond to violations or indications of violations.  Our team of international trade attorneys at Fox Rothschild can assist with any of these matters.