Chapter_007R

Learning Objectives

This chapter deals with two broad issues involving the legal environment. The first issue is concerned with the problems that arise with international commercial contracts and settling disputes when they arise. Since there is no international commercial law or international commercial courts, disputes must be settled under the laws of one of the countries where the parties of the contract reside or, if an arbitration clause is included in the contract, by arbitration. Although there is no international commercial law per se, the agreement to enforce arbitration decisions that exists among a large number of countries does create a system that approaches international commercial court. The second issue concerns the common law bases for the U.S. legal system which creates problems for U.S. companies when interpreting the laws in countries whose legal systems are based either on code, socialist, or Islamic law. A review of the different legal systems is important for students to appreciate the problems that arise in protecting such things as intellectual property rights, etc. I continue to discuss socialist law even though most formerly socialist countries are moving toward a different system. My reasoning is that the legacy of a socialist legal system continues to influence how businesspeople think about legal matters. The teaching objectives of this chapter are to:

1) Help students understand the four legal systems of the world’s countries.

2) Appreciate the critical nature of jurisdiction when legal disputes arise and thus, the need for solutions other than litigation.

3) Understand the difficulty of protecting intellectual property rights and how those rights can easily be lost if the company depends on its rights as defined in a common law country to protect it in a code law country.

4) Know that in addition to the commercial laws within in a country, a U.S. company must abide by certain U.S. laws as well.

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Comments and Suggestions

1. Cultural differences in interpreting similar legal concepts, for example, patent law, is illustrated in the comparison of patent law illustrated in Crossing Borders 7-1, Patent Law: The United States Versus Japan.

2. In the discussion of intellectual property rights there are two points to make: 1) gaining legal protection for patents, trademarks, processes, copyrights, etc. under the legal system of a country and, 2) the problems of counterfeiting and/or piracy of intellectual property rights. While a company may have the legal protection of a patent or trademark that law abiding companies honor, there is the ever-growing problems of piracy and counterfeiting.

I differentiate between piracy and counterfeiting. Although most discussions do not differentiate between the two, they are two separate problems. When piracy occurs, the pirated product is of the same quality as an original, for example, a company duplicates a piece of software or copies a video tape. In counterfeiting, the product is make to look like an original but is not of the quality as the original. Books, audio and video tapes, movies, and software are often pirated. In such cases, the product is of the same quality as the original but, of course, the company does not get any revenue from the sale. It is estimated that over $40 billion is lost annually to piracy.

With a counterfeit product, not only does the company not receive revenue from the sale of the counterfeit product, but if the quality is poor, as is often the situation, damage is also done to the product image and the use of counterfeit products can cause accidents and product failure. I have seen counterfeit Levis that look like the real thing but after two or three washings, the poor quality of the fabric is apparent. Auto and aircraft accidents have been attributed to counterfeit parts sold in the United States. The only protection companies have against piracy and counterfeiting is through the cooperation of host countries and efforts by the U.S. government. Articles that explores these issues are: Dave Savona, “Waging War on Pirates,” International Business, January 1995, pp. 42-46 and “Modern Day Pirates A Threat Worldwide,” Advertising Age, March 20, 1995, p. I-3.

This article has some interesting data on losses by product category and country. For example, in 1994, motion picture companies lost $145 million in the Russian Federation and $321 million in Italy while software losses in Japan amount to $1.1 billion.

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Lecture Outline I. II. III.

The International Legal Environment: Playing by the Rules Global Perspective—The Pajama Caper Bases for Legal Systems A. Common and Code Law B. Islamic Law

C. Marxist-Socialist Tenets IV. V.

Jurisdiction in International Legal Disputes International Dispute Resolution A. Conciliation B. Arbitration C. Litigation VI.

Protection of Intellectual Property Rights—A Special Problem A. Counterfeiting and Piracy B. Inadequate Protection C. Prior Use versus Registration D. International Conventions VII.

Commercial Law within Countries A. Marketing Laws

B. Green Marketing Legislation C. Antitrust

VIII. U.S. Laws Apply in Host Countries

A. Foreign Corrupt Practices Act B. National Security Laws C. Antitrust Laws D. Antiboycott Laws

D. Extraterritorially of U.S. Laws

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IX. Cyber Law—Unresolved Issues A. Cybersquatters B. Taxes

C. Jurisdiction of Disputes and Contracts

X. Summary

Discussion Questions 1.

2. How does the international marketer determine what legal system will have jurisdiction when legal disputes arise? Since there is no judicial body to deal with legal problems arising between citizens of different countries, the foreign marketer must look to the legal systems of all the countries involved; that is, the laws of his own country and the laws of the country in which he is conducting business. In general, a U.S. citizen is subject to the laws of the United States as well as to those of any foreign country in which he lives or works. In the case of a conflict, and unless the government of the citizen takes up the citizen’s case in an international court, jurisdiction is generally determined (1) on the basis of jurisdictional clauses included in the contract, (2) on the basis of where a contract was entered into, or (3) on the basis of where the provisions of the contract were performed. The jurisdictional clause is the most clear-cut and is usually honored. If there is no such clause or if it is ineffective, either of the other two methods is used.

3. Discuss the state of international commercial law.

Commercial law, as seen in Question 1, varies in meaning between common law (where commercial disputes are subject either to civil or commercial law) and code law (where a

Define: Common Law Islamic Law

Prior use vs. registration Arbitration Cybersquatters

Code Law

Marxist-Socialist tenets Conciliation Litigation

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codified inclusive commercial law exists). Consequently, there is no such thing as an “international” commercial law, and the question of jurisdiction is handled as described in Question 2. In general, the marketer must deal with national commercial laws and must vary his operations from country to country with regard to its individual laws. Progress toward unification is being taken with greatest success in the EEC countries, which eventually aim toward a unified commercial legal system as well as unification in all other areas, especially political.

4. Discuss the limitations of jurisdictional clauses in contracts.

In general, jurisdictional clauses, when present in a contract, are honored by the courts. For example, it is not unusual for a court to use the law of another country for its decisions. However, if the contractual events are not in effect, entered into or executed within the state indicated, courts have been known to disregard the jurisdictional clause and apply different rules in determining what law governs. Since there is no obligation for the courts to uphold jurisdictional clauses, the parties must be reasonable when adding such clauses, or they are liable to have very limited actual value.

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5. What is the “objective theory of jurisdiction?” How does it apply to a firm doing business within a foreign country?

The question of U.S. sovereignty over its citizens abroad has been dealt with by the “objective theory of jurisdiction” which states that “even if an act is committed abroad, that is outside the territorial jurisdiction of the courts, those courts can nevertheless have jurisdiction over it if this act produces consequences or effects within the United States.” Broadly interpreted, this means that an American is always a citizen of the United States and is subject to its laws as interpreted by the U.S. courts. Commonly interpreted, however, only those violations of U.S. laws which “affect our foreign or domestic trade” are considered subject to the U.S. legal system when operations are outside the legal jurisdiction of U.S. courts. Since an American working, traveling, or living in a foreign country is subject to the laws of that country and must obey them, he will not be punished by an American court if he is at the same time violating a domestic U.S. law. It is obvious, however, that a firm (U.S.) in a foreign country must consider at least two sets of laws, and perhaps more. This is especially important in antitrust cases, or with laws governing loyalty and U.S. citizenship (i.e., trading with enemy, political office in foreign countries, offices in political parties, etc.).

6. Discuss some of the reasons why it is probably best to seek an out-of-court settlement in international commercial legal disputes rather than sue.

The most important reasons for avoiding court settlements of international legal disputes is that they are time consuming, frustrating, and costly. In addition, court cases are often publicized and may create a poor image of the company; the courts may not be well versed in the problem and thus hand down an unfair decision; and a more fair, less time consuming and less expensive decision can often be reached through arbitration. As a result of the high costs of litigation, the philosophy of most companies is to first “placate,” second to “arbitrate,” and to “litigate” as a last resort.

7. Illustrate the procedure generally followed in international commercial disputes when settled under the auspices of a formal arbitration tribunal.

Arbitration obviously depends upon the willingness of both parties to accept the arbitrator’s rulings; it has been most successful when provision for this method of settlement is included in the contract. However, there is some question of the legality of enforcing arbitration

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agreements which have been made prior to a dispute. While the theory of arbitration is that each of the parties involved in the dispute selects or agrees upon a referee or judge of the case, in actual practice most arbitration is submitted to one of the established arbitration boards and to established rules and procedures. The general procedure followed by an established arbitration tribunal is that of immediately attempting a conciliation between the parties. If not successful, each party selects an arbitrator to defend its case, the court appoints a third member (from a list of arbitrators it maintains), hearings of both sides take place, a decision and an award is made. Such decisions have had a great deal of success, i.e., they are upheld by the parties.

8. What are intellectual property rights? Why should a company in international marketing take special steps to protect them?

Industrial property rights are rights to the exclusive or limited use of products, processes, designs, formulas, brand names, and trademarks which provide a company with advantages over competitors; i.e., patents, trademarks, and copyrights. Such industrial properties are among the most important assets of a company because they symbolize quality, entice consumers, and have a psychological or intangible quality which is invaluable. Because of this fact and the fact that millions of dollars are spent developing such qualities, the international marketer should take special steps to govern these properties since the rules governing them vary from country to country. (See next question.)

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9. In many code law countries, ownership of intellectual property rights is established by registration rather than prior use. Comment.

Most countries of the world follow a code law principle concerning property rights. That is, rights are established by registration, and the first to register a product is its legal owner. In the United States, the common law principle is observed: prior use established ownership. That is, whoever can establish first use is considered the owner and has legal rights. Obviously, an oversight in understanding these differences may result in much pirating and the loss of property rights, or at least in the loss of a great deal of time, effort, and/or money. Obviously, uniform laws would help since the international marketer must necessarily consider the world as his or her market and should have a means of obtaining worldwide intellectual property rights.

10. Discuss the advantages to the international marketer arising from the existence of the various international conventions on trademarks, patents, and copyrights.

The obvious advantage to international marketers arising from the existence of the various international conventions on trademarks, patents, and copyrights is that their product, their sales, their profits are more easily protected, i.e., the marketer may register the product at the same time in many countries, thus avoiding piracy, eliminating time-consuming patent procedures and bureaucracy. in addition, such conventions make an attempt at establishing uniform requirements. Obviously, the situation is difficult when different countries have different attitudes toward the rights of individuals. In most countries, the individual may not obtain exclusive monopoly of a product without manufacturing and selling that product (as an individual may in the United States) but must share the product with the citizens of the country. The patent will revert to public domain if the product isn’t manufactured within a specified time. Thus, conventions aid the businessperson by enabling him or her to more easily patent the product, to jog his or her memory that laws are not uniform and that he or she needs a worldwide basis of protection, and to eliminate much time. In addition, conventions serve as the machinery for obtaining these rights and as a possible means of establishing uniform worldwide industrial property rights laws.

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11. “The legal environment of the foreign marketer takes on an added dimension of importance since there is no single uniform international commercial law which governs foreign business transactions.” Comment.

As discussed in Question 10, the lack of uniform commercial laws results in the expenditure of much time, energy, and money on the part of the marketer. In addition, a lack of understanding of foreign laws or customs may have serious consequences for the unwary businessperson. Furthermore, information concerning these customs and laws might be hard to obtain. Since any mistakes are liable to have legal consequences, they thus represent some sort of loss to the company. Since customs, politics, geography and innumerable other factors vary greatly, affect, and are affected by the legal environment, it is imperative that the businessperson be acquainted with all aspects. Since legal questions also establish insurmountable roadblocks, the wisest course for the international marketer is to have reference to a council well versed in the intricacies of the international legal environment. 12. Why is conciliation a better way to resolve a commercial dispute than arbitration? Although arbitration is generally regarded as the best means of settling international disputes, a preliminary effort at conciliation is the best method for resolving disputes with a Chinese business partner. In fact, some Chinese companies may avoid doing business with companies that go first to arbitration when differences arise. Conciliation is considered by the Chinese to be far friendlier than arbitration or litigation in settling disputes. The Chinese believe that when a dispute occurs, friendly negotiation should be used first to solve the problem; if that fails, then conciliation should be tried. The Chinese are less threatened with conciliation but, unfortunately, neither side is bound to a conciliation settlement, as would be the case under arbitration.

13. Differentiate between conciliation and arbitration.

The main difference between conciliation and arbitration is that neither side is bound to a conciliation settlement as would be the case under arbitration. Conciliation can be either formal or informal. Informal conciliation can be established by both sides agreeing on a third party to mediate. In China, formal conciliation is conducted under the auspices of the Beijing Conciliation Center that assigns one or two conciliators to mediate. If agreement is reached, a conciliation statement based on the signed agreement is recorded. Although conciliation may

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be the friendly route to resolving disputes in China, it is not legally binding so an arbitration clause should be included in all conciliation agreements. Experience has shown that having an arbitration clause in the conciliation agreement makes it easier to move to arbitration if necessary. For companies doing business in China, settlement of disputes should follow four steps; first informal negotiation; if this does not work, conciliate, arbitrate; and finally, litigate.

14. Assume you are a vice-president in charge of a new business-to-business e-commerce division of a well-known major international auto parts manufacturer. A) A cyber squatter has registered the company name as a domain Web name. What are your options to secure the domain name for your company? B) Discuss the steps you should take to ensure worldwide protection of your domain name.

Existing law is vague or does not exist for such issues as the protection of domain names, taxes, jurisdiction in cross-border transactions and contractual issues. Countries are beginning to draft legislation to deal with myriad legal questions not clearly addressed by current law.

Companies need to ensure their domain names are protected in all countries where they intend to maintain country specific Web sites. Unless a domain name is registered in a specific country, a company faces a costly battle to regain its use if another party has registered it. If a cyber squatter has registered a domain name a company wants, the only alternative is to buy it back or sue if it infringes on the company’s intellectual property or some how damages a company’s reputation. Toymaker Hasbro recently brought a successful action against an adult entertainment Web site, “candyland.com.” Hasbro markets a game for children called Candy Land, although not directly infringing on its trademark, the courts deemed it to be damaging the reputation of Hasbro and its children’s game. The Web address now takes you directly to a Hasbro site.

If a business has taken steps to properly defend its brand names, trade names or product names and properly registers them, it greatly enhances its ability to defend against improper use of the name by a third party. Steps can be taken to secure trade names and trademarks through an international program of trademark registration that would be tied into registration of domain names. Countries that recognize intellectual property will generally refer to those

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laws to resolve disputes. In Germany, for example, regional and local courts have held that reserving and using an internet domain that infringes third party rights (e.g., the party's duly registered trademark) is prohibited and that the courts have jurisdiction over any such infringement if the domain name can be duly accessed in Germany.

The U.S. has taken a giant step to develop laws for dealing with domain name pirates by passing the Anticybersquatting Consumer Protection Act, a formal policy for protection of trademark owners. It facilitates action against domain name squatters if the domain name infringes on a trademark or personal name.1 Julia Roberts, the movie actor, was one of the first to sue under this law to regain the use of “juliaroberts.com” registered by a cyber squatter.

Nevertheless, laws covering domain names remains uncertain and the rush to register domain names by third parties will continue. Registering a domain name offers the best protection in countries like Singapore where the law stipulates that the first person to register a domain name, whether the rightful owner or not, will be given exclusive right to its use. If there is any dispute, the parties will have to seek resolution in a Singapore court. Companies must protect against the use of domain names that infringe on its intellectual property, threaten its reputation or confuse the public. They should be mindful that if they do not register their desired domain name first, the only recourse is to purchase the right or go to court. 15. Discuss the issues of a website being sued for libel for information posted on the site. The United States has taken a giant step in dealing with domain name pirates by passing the Anti-cybersquatting Consumer Protection Act (ACPA) and the World Intellectual Property Organization (WIPO) established a structure through the Internet Corporation for Assigned Names and Numbers (ICANN) in which anyone registering a domain name with complying registries has to agree to dispute resolution. This is known as the Uniform Dispute Resolution Policy (UDRP). Neither the ACPA nor the UDPR provide failsafe ways of recovering a domain name once it has been cybersquatted.

A study indicated that protection is needed for geographical names, ethnic groups and pharmaceutical substances, all of which have been appropriated by CSQs. These abuses will continue unless preventive steps are taken. Agencies like the ACAP, DRS, and the World

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Intellectual Property Organization (WIPO) are useful, but, besides being costly, they only address disputes involving sites using names that are trademarked and have commercial value or are so well known they have common law trademark rights. Even though protection from cybersquatters is not perfect, if a business has taken steps to properly defend its brand names, trade names, or product names and properly registers them, it greatly enhances its ability to defend against improper use of the name by a third party. Countries that recognize intellectual property will generally refer to those laws to resolve disputes.

Most country’s courts are inclined to assert jurisdiction over online activity, where it originates, so long as harm is experienced locally and the sense is that the party responsible either knew or ought to have known that the harm was a likely consequence of their actions. Most agree though that the laws that are expressly designed to apply not just in a single country but worldwide are necessary to untangle the legal hassles that are occurring. 16. Discuss the motives of a cybersquatter. What resources does a company have to defend itself against a cybersquatters.

Unfortunately, the ease with which Web names can be registered and the low cost of registering has led to thousands being registered. Cybersquatters (CSQ) buy and register descriptive nouns, geographic names, ethnic groups, pharmaceutical substances and other similar descriptors and hold them until they can be sold at an inflated price. For example, a cybersquatter sold http://www.themortgage.com/ for $500,000; the record price paid so far is $7.5 million for the domain name http://www.business.com/. If a cybersquatter has registered a generic domain name that a company wants, the only recourse is to buy it.

Another ploy of CSQ is to register familiar names and known trademarks that divert traffic from intended destinations or to sell competing products. eBay, the world’s largest online auction house, was embroiled in a dispute with an entrepreneur in Nova Scotia who registered

http://www.ebay.ca/, thus

forcing

the

U.S.

company

to

use

http://www.ca.ebay.com/ for its newly launched Canadian website until it was successful in regaining the use of http://www.ebay.ca/; both web addresses now go to the same site. CSQ register a well-known brand or trademark that misdirects a person to the CSQ’s site or to a competing company’s site. For example, an adult entertainment website registered

1

John Musgreave and Graham Porter, “Domain Name Pirates Whip Up Web Havoc,” The London Free Press, May 22, 2000.

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http://www.candyland.com/. Hasbro, the toy company, markets a game for children called “Candy Land”. Disturbed by the thought that customers might end up at an adult entertainment site, Hasbro wanted to have the site vacated. They had the option of suing to have it removed or to buy the domain name. Hasbro elected to sue and, although the adult website was not directly infringing on its trademark, the courts deemed it to be damaging to the reputation of Hasbro and its children’s game. The Web address now takes you directly to a Hasbro site.

In addition to CsQs hijacking trademarks, personal names and other intellectual property, lawsuits involving libel, defamation, and product liability, are creating legal quagmires for Internet users. Consider a case involving Dow Jones and an Australian industrialist over an allegedly defamatory article that appeared on one of the U.S.-based Dow Jones’ publication’s web site. The plaintiff sued Dow Jones, the web site owner as as the author of the article. Dow Jones argued that the suit should be tried in a New Jersey court, where its servers, the point of publication, are located. The Australian argued that the suit should be brought in Australia because that is where his reputation had been damaged. Australian law favors plaintiffs, whereas in the U.S. the First Amendment Rights demand a high burden of proof in libel cases. Australian courts sided with the plaintiff

It is easy to imagine many situations where the actions of companies or information posted on a site can lead to a law suit when Internet content is unlawful in one country but not in the host country. For example, an American studio that makes a movie with nude scenes could be prosecuted in a country that bans nudity in movies. Not only would the movie studio be libel but the Internet service provider could be liable for material posted on its Web site. Writers and publishers could face libel suits in countries with restrictive laws of free speech where weak or nonexistent free speech protections are tools to intimidate and censor. Internet publishers or individual web site owners fear they can be sued for defamation from any or many jurisdictions, merely because their articles can be downloaded where ever in the world. Lawsuits involving libel, defamation, and product liability cause companies to voluntarily restrict their web site to selected countries rather than leave themselves open to legal action. The Internet is not a libel-free zone.

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